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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, 2015

 

¨ 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:

4,774,856 shares of common stock on November 2, 2015

 

 

 


Table of Contents

FORM 10-Q

For the interim period ending September 30, 2015

INDEX

 

PART I - FINANCIAL INFORMATION

  

ITEM 1.

 

FINANCIAL STATEMENTS

  
 

CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014

     3   
 

CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

     4   
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

     5   
 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

     5   
 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

     6   
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     7   

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     27   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     33   

ITEM 4.

 

CONTROLS AND PROCEDURES

     33   

PART II - OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     33   

ITEM 1A.

 

RISK FACTORS

     33   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     34   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     34   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     34   

ITEM 5.

 

OTHER INFORMATION

     34   

ITEM 6.

 

EXHIBITS

     34   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

     September 30, 2015     December 31, 2014 (1)  
(Dollars in thousands)    (unaudited)        

ASSETS

    

Cash and due from banks

   $ 5,424      $ 6,181   

Interest-bearing deposits

     7,578        14,784   

Federal funds sold

     466        119   

Securities available-for-sale, at fair value

     53,895        42,604   

Restricted securities

     2,261        2,430   

Loans receivable, net of allowance for loan losses of $3,374 and $3,205

     329,231        295,242   

Loans held for sale

     1,182        —     

Premises and equipment, net

     11,857        11,882   

Accrued interest receivable

     1,207        1,197   

Other real estate owned, net

     2,343        2,791   

Bank owned life insurance

     7,535        7,348   

Goodwill

     2,808        2,808   

Mortgage servicing rights

     642        596   

Other assets

     3,537        2,504   
  

 

 

   

 

 

 

Total assets

   $ 429,966      $ 390,486   
  

 

 

   

 

 

 

LIABILITIES

    

Noninterest-bearing deposits

   $ 61,609      $ 63,308   

Savings and interest-bearing demand deposits

     159,274        122,502   

Time deposits

     118,501        121,775   
  

 

 

   

 

 

 

Total deposits

     339,384        307,585   

Securities sold under repurchase agreements

     10,491        6,012   

Federal Home Loan Bank advances

     30,000        35,000   

Subordinated debt, net of issuance costs

     6,839        —     

Other liabilities

     3,194        2,651   
  

 

 

   

 

 

 

Total liabilities

     389,908        351,248   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock ($5 par value; authorized - 10,000,000 shares; outstanding - 4,774,856 and 4,817,856 shares, respectively)

     23,874        24,089   

Additional paid-in capital

     2,766        2,777   

Retained earnings

     14,249        13,293   

Accumulated other comprehensive loss, net

     (831     (921
  

 

 

   

 

 

 

Total shareholders’ equity

     40,058        39,238   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 429,966      $ 390,486   
  

 

 

   

 

 

 

 

(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, 2015     September 30, 2014     September 30, 2015     September 30, 2014  

INTEREST INCOME

        

Loans, including fees

   $ 3,810      $ 3,323      $ 11,200      $ 9,763   

Securities:

        

Taxable

     159        93        434        272   

Tax-exempt

     102        92        276        286   

Interest-bearing deposit accounts

     9        7        30        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,080        3,515        11,940        10,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

        

Deposits

     643        456        1,729        1,363   

Federal funds purchased

     —          —          —          1   

Securities sold under repurchase agreements

     4        3        8        7   

Subordinated debt

     119        —          161        —     

FHLB advances

     87        76        259        261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     853        535        2,157        1,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     3,227        2,980        9,783        8,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     84        190        354        452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,143        2,790        9,429        8,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME

        

Income from fiduciary activities

     197        193        589        580   

Service charges and fees on deposit accounts

     237        249        686        736   

VISA-related fees

     44        60        153        210   

Non-deposit product income

     77        209        324        447   

Other service charges and fees

     144        134        414        403   

Secondary market lending income

     171        213        409        392   

Increase in cash surrender value of life insurance

     62        64        187        155   

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

     2        (8     4        (25

Other real estate losses

     (167     (60     (247     (279

Net gains (losses) on the disposal of fixed assets

     1        (2     (6     136   

Other income

     5        18        62        52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     773        1,070        2,575        2,807   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSES

        

Salaries and employee benefits

     1,959        1,653        5,847        4,837   

Occupancy expense

     465        356        1,342        1,068   

Software maintenance

     175        116        465        391   

Bank franchise tax

     61        47        159        141   

VISA expense

     19        26        83        134   

Telephone expense

     35        52        101        160   

FDIC assessments

     71        63        200        201   

Foreclosure property expense

     15        46        36        105   

Consulting expense

     71        75        236        244   

Other expense

     714        743        2,377        2,171   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     3,585        3,177        10,846        9,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

     331        683        1,158        1,607   

Income tax expense

     50        171        202        375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 281      $ 512      $ 956      $ 1,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

        

Average basic shares outstanding

     4,780,649        4,818,733        4,797,405        4,818,454   

Earnings per share, basic

   $ 0.06      $ 0.11      $ 0.20      $ 0.26   

Diluted Earnings Per Share

        

Average diluted shares outstanding

     4,796,008        4,828,285        4,811,129        4,831,055   

Earnings per share, diluted

   $ 0.06      $ 0.11      $ 0.20      $ 0.26   

See Notes to Consolidated Financial Statements.

 

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Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
(Dollars in thousands)    2015     2014     2015     2014  

Net income

   $ 281      $ 512      $ 956      $ 1,232   

Other comprehensive income:

        

Unrealized gains (losses) on securities:

        

Unrealized holding gains arising during the period

     403        177        140        1,002   

Deferred tax expense

     (136     (60     (47     (340

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

     (2     8        (4     25   

Deferred tax (benefit) expense

     —          (3     1        (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains adjustment, net of tax

     265        122        90        678   
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plan:

        

Net periodic pension cost (benefit)

     4        (6     8        (17

Net pension (loss) gain

     (4     6        (8     17   

Deferred tax benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plan adjustment, net of tax

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Post retirement benefit plan:

        

Net periodic cost

     14        11        40        34   

Net loss

     (14     (11     (40     (34

Deferred tax benefit

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Post retirement benefit plan adjustment, net of tax

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     265        122        90        678   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 546      $ 634      $ 1,046      $ 1,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2015

             

Balance at beginning of period

     4,817,856      $ 24,089      $ 2,777      $ 13,293       $ (921   $ 39,238   

Net income

     —          —          —          956         —          956   

Other comprehensive income

     —          —          —          —           90        90   

Stock repurchase

     (43,000     (215     (28     —           —          (243

Stock-based compensation expense

     —          —          17        —           —          17   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

     4,774,856      $ 23,874      $ 2,766      $ 14,249       $ (831   $ 40,058   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     For the Nine Months Ended
September 30,
 
(Dollars in thousands)    2015     2014  

Cash Flows From Operating Activities

    

Net income

   $ 956      $ 1,232   

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

    

Depreciation

     727        573   

Net amortization and accretion of securities

     280        281   

Amortization of subordinated debt issuance costs

     5        —     

Provision for loan losses

     354        452   

Stock compensation expense

     17        20   

(Gain) loss on securities available-for-sale

     (4     25   

Increase in OREO valuation allowance

     159        187   

Loss on sale of other real estate

     88        92   

Loss (gain) on disposal of fixed assets

     6        (136

Mortgage servicing rights

     (46     (41

Loan originations for sale

     (11,857     (8,306

Loan sales

     10,887        8,706   

Gain on sold loans

     (212     (204

Increase in cash surrender value of life insurance

     (187     (155

(Increase) decrease in accrued income and other assets

     (308     404   

Increase (decrease) in other liabilities

     555        (99
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,420        3,031   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

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

     2,309        3,888   

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

     4,819        3,810   

Purchase of bank owned life insurance

     —          (2,000

Purchases of available-for-sale securities

     (18,561     (4,974

Sales (purchases) of restricted securities

     169        (342

Increase in federal funds sold

     (347     (17

Loan (originations) and principal collections, net

     (35,050     (23,112

Proceeds from sale of other real estate

     520        371   

Purchases of premises and equipment

     (1,111     (780

Proceeds from the sale of premises and equipment

     —          311   
  

 

 

   

 

 

 

Net cash used in investing activities

     (47,252     (22,845
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

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

     35,073        6,662   

Net (decrease) increase in time deposits

     (3,274     896   

Repurchase of common stock

     (243     —     

Issuance of subordinated debt, net

     6,834        —     

Net increase (decrease) in securities sold under repurchase agreements

     4,479        (2,140

(Decrease) increase in Federal Home Loan Bank advances

     (5,000     10,000   
  

 

 

   

 

 

 

Net cash provided by financing activities

     37,869        15,418   
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (7,963     (4,396

Cash and cash equivalents (including interest-earning deposits) at beginning of period

     20,965        15,689   
  

 

 

   

 

 

 

Cash and cash equivalents (including interest-earning deposits) at end of period

   $ 13,002      $ 11,293   
  

 

 

   

 

 

 

Supplemental Schedule of Cash Flow Information

    

Cash paid for:

    

Interest

   $ 2,102      $ 1,665   
  

 

 

   

 

 

 

Income taxes

     590        341   
  

 

 

   

 

 

 

Non-cash investing and financing:

    

Unrealized gain on investment securities

     136        1,027   
  

 

 

   

 

 

 

Change in fair value of pension and post-retirement obligation

     —          —     
  

 

 

   

 

 

 

Loans transferred to other real estate owned

     437        197   
  

 

 

   

 

 

 

Loans originated to facilitate sale of OREO

     118        605   
  

 

 

   

 

 

 

Changes in deferred taxes resulting from OCI transactions

     46        349   
  

 

 

   

 

 

 

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, 2014.

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 are 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.

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:

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 the loan balance.

 

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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). 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, which are unsecured.

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.

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.

 

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Note 3: Amendments to the Accounting Standards Codification

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30) which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction of the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. ASU 2015-03 is effective for periods beginning after December 15, 2015. The Company has adopted the guidance during the second quarter of 2015 and it did not have a material impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments modify the evaluation reporting organizations must perform to determine if certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the provisions of ASU No. 2015-02 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items. ASU 2015-01 eliminates the concept of extraordinary items. However, the presentation and disclosure requirements for items that are either unusual in nature or infrequent in occurrence remain and will be expanded to include items that are both unusual in nature and infrequent in occurrence. ASU 2015-01 is effective for periods beginning after December 15, 2015. ASU 2015-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supercedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014. However, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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. In August 2015, the FASB issued ASU 2014-09 changing the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017 from December 15, 2016. The Company is evaluating the impact that ASU 2014-09 will have on its consolidated financial statements.

 

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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, 2015

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

Corporate bonds

   $ 700       $ —         $ —         $ 700   

U.S. Government agencies

     23,046         126         (36      23,136   

State and municipal obligations

     24,490         202         (130      24,562   

Certificates of deposits

     5,456         41         —           5,497   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 53,692       $ 369       $ (166    $ 53,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Available-for-sale securities December 31, 2014

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

U.S. Government agencies

   $ 16,969       $ 33       $ (37    $ 16,965   

State and municipal obligations

     23,335         226         (160      23,401   

Certificates of deposits

     2,232         8         (2      2,238   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 42,536       $ 267       $ (199    $ 42,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

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)    2015      2014      2015      2014  

Gross realized gains

   $ 3       $ 3       $ 27       $ 8   

Gross realized losses

     (1      (11      (23      (33
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ 2       $ (8    $ 4       $ (25
  

 

 

    

 

 

    

 

 

    

 

 

 

Aggregate proceeds

   $ 1,995       $ 479       $ 4,819       $ 3,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average yields (taxable equivalent) on securities were 2.40% and 2.43% for the three months ended September 30, 2015 and 2014, respectively, and 2.40% and 2.39% for the nine months ended September 30, 2015 and 2014, respectively.

Securities with a market value of $12.4 million and $8.5 million were pledged as collateral for repurchase agreements and for other purposes as required by law as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015 and December 31, 2014, all the securities pledged to repurchase agreements were state and municipal obligations. All the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $10.5 million and $6.0 million as of September 30, 2015 and December 31, 2014, respectively, and included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value.

Securities in an unrealized loss position at September 30, 2015 and December 31, 2014, 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, 2015 included nine federal agencies and 27 municipals. Bonds with unrealized loss positions at December 31, 2014 included 13 federal agencies, 29 municipals and three certificates of deposit. The tables are shown below.

 

(Dollars in thousands)    Less than 12 months      12 months or more      Total  

September 30, 2015

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

U.S. Government agencies

   $ 3,280       $ 18       $ 1,745       $ 18       $ 5,025       $ 36   

States and municipal obligations

     5,328         38         3,438         92         8,766         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 8,608       $ 56       $   5,183       $ 110       $ 13,791       $ 166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      12 months or more      Total  

December 31, 2014

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

U.S. Government agencies

   $ 1,499       $ 4       $ 3,532       $ 33       $ 5,031       $ 37   

States and municipal obligations

     412         5         9,006         155         9,418         160   

Certificates of deposit

     742         2         —           —           742         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,653       $ 11       $ 12,538       $ 188       $ 15,191       $ 199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $1.6 million and $1.9 million at September 30, 2015 and December 31, 2014, respectively. The Company also had an investment in Federal Reserve Bank of Richmond (“FRB”) stock which totaled $460 thousand and $382 thousand at September 30, 2015 and December 31, 2014, respectively. 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 provisions related 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 FHLB and FRB stock.

 

Note 5: Loans

The following is a summary of the balances of loans:

 

(Dollars in thousands)    September 30, 2015      December 31, 2014  

Mortgage loans on real estate:

     

Construction, Land and Land Development

   $ 44,571       $ 43,048   

Farmland

     1,054         1,128   

Commercial Mortgages (Non-Owner Occupied)

     23,799         20,534   

Commercial Mortgages (Owner Occupied)

     41,723         33,326   

Residential First Mortgages

     156,004         135,267   

Residential Revolving and Junior Mortgages

     26,579         25,400   

Commercial and Industrial loans

     33,636         34,002   

Consumer Loans

     4,907         5,349   
  

 

 

    

 

 

 

Total loans

     332,273         298,054   

Net unamortized deferred loans costs

     332         393   

Allowance for loan losses

     (3,374      (3,205
  

 

 

    

 

 

 

Loans, net

   $ 329,231       $ 295,242   
  

 

 

    

 

 

 

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, 2015

   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

   $ 129       $ —         $ 811       $ 940       $ 43,631       $ 44,571   

Farmland

     —           —           —           —           1,054         1,054   

Commercial Mortgages (Non-Owner Occupied)

     —           —           —           —           23,799         23,799   

Commercial Mortgages (Owner Occupied)

     245         —           1,507         1,752         39,971         41,723   

Residential First Mortgages

     610         393         861         1,864         154,140         156,004   

Residential Revolving and Junior Mortgages

     54         72         45         171         26,408         26,579   

Commercial and Industrial

     —           —           121         121         33,515         33,636   

Consumer Loans

     17         12         12         41         4,866         4,907   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,055       $ 477       $ 3,357       $ 4,889       $ 327,384       $ 332,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Loans Past Due and Nonaccruals December 31, 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

   $ 64       $ —         $ 669       $ 733       $ 42,315       $ 43,048   

Farmland

     —           —           —           —           1,128         1,128   

Commercial Mortgages (Non-Owner Occupied)

     —           —           —           —           20,534         20,534   

Commercial Mortgages (Owner Occupied)

     —           —           566         566         32,760         33,326   

Residential First Mortgages

     1,270         —           359         1,629         133,638         135,267   

Residential Revolving and Junior Mortgages

     6         —           31         37         25,363         25,400   

Commercial and Industrial

     96         —           228         324         33,678         34,002   

Consumer Loans

     66         14         101         181         5,168         5,349   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,502       $   14       $ 1,954       $ 3,470       $ 294,584       $ 298,054   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 6: Allowance for Loan Losses

Loans Evaluated for Impairment

Loan receivables evaluated for impairment individually and collectively by segment as of September 30, 2015 and December 31, 2014 are as follows:

 

(Dollars in thousands)

As of September 30, 2015

   Mortgage
Loans
on Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

Individually evaluated for impairment

   $ 7,679       $ 119       $ 2       $ 7,800   

Collectively evaluated for impairment

     286,051         33,517         4,905         324,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 293,730       $ 33,636       $ 4,907       $ 332,273   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2014

   Mortgage
Loans
on Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

Individually evaluated for impairment

   $ 6,842       $ —         $ 16       $ 6,858   

Collectively evaluated for impairment

     251,861         34,002         5,333         291,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 258,703       $ 34,002       $ 5,349       $ 298,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

The allowance for loan losses disaggregated based on loan receivables evaluated for impairment individually and collectively by segment as of September 30, 2015 and December 31, 2014 are as follows:

 

(Dollars in thousands)

As of September 30, 2015

   Mortgage
Loans
on Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

Individually evaluated for impairment

   $ 711       $ 119       $ —         $ 830   

Collectively evaluated for impairment

     2,103         314         127         2,544   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 2,814       $ 433       $ 127       $ 3,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2014

   Mortgage
Loans
on Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

Individually evaluated for impairment

   $ 665       $ —         $ 11       $ 676   

Collectively evaluated for impairment

     2,113         323         93         2,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 2,778       $ 323       $ 104       $ 3,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

A disaggregation 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, 2015                            

ALLOWANCE FOR LOAN LOSSES:

           

Beginning Balance

   $ 2,889       $ 420       $ 130       $ 3,439   

(Charge-offs)

     (12      (132      (17      (161

Recoveries

     6         —           6         12   

Provision

     (69      145         8         84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 2,814       $ 433       $ 127       $ 3,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(Dollars in thousands)    Mortgage
Loans on
Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  
For the Nine Months Ended September 30, 2015                            

ALLOWANCE FOR LOAN LOSSES:

           

Beginning Balance

   $ 2,778       $ 323       $ 104       $ 3,205   

(Charge-offs)

     (13      (132      (103      (248

Recoveries

     16         —           47         63   

Provision

     33         242         79         354   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 2,814       $ 433       $ 127       $ 3,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015

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

Grade:

                 

Pass

   $ 36,909       $ 1,054       $ 18,807       $ 32,443       $ 31,780       $ 120,993   

Watch

     5,441         —           4,444         4,103         1,497         15,485   

Special mention

     1,146         —           284         2,697         269         4,396   

Substandard

     1,075         —           264         2,480         90         3,909   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,571       $ 1,054       $ 23,799       $ 41,723       $ 33,636       $ 144,783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2014

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

Grade:

                 

Pass

   $ 34,913       $ 1,128       $ 16,426       $ 23,967       $ 31,041       $ 107,475   

Watch

     5,649         —           3,770         4,430         2,492         16,341   

Special mention

     1,403         —           —           2,789         154         4,346   

Substandard

     1,083         —           338         2,140         315         3,876   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 43,048       $ 1,128       $ 20,534       $ 33,326       $ 34,002       $ 132,038   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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)           Residential                

As of September 30, 2015

PAYMENT ACTIVITY STATUS

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

Performing

   $ 154,750       $ 26,462       $ 4,883       $ 186,095   

Nonperforming

     1,254         117         24         1,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 156,004       $ 26,579       $ 4,907       $ 187,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2014

PAYMENT ACTIVITY STATUS

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

Performing

   $ 134,908       $ 25,369       $ 5,234       $ 165,511   

Nonperforming

     359         31         115         505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 135,267       $ 25,400       $ 5,349       $ 166,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $2.2 million as of September 30, 2015.
(2) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $15 thousand as of September 30, 2015.
(3) Consumer Loans which have been assigned a risk rating grade of Substandard were $4 thousand as of September 30, 2015.
(4) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $2.1 million as of December 31, 2014.
(5) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $219 thousand as of December 31, 2014.
(6) Consumer Loans which have been assigned a risk rating grade of Substandard totaled $1 thousand as of December 31, 2014.

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, 2015 and December 31, 2014, along with the average recorded investment and interest income recognized for the three and nine months ended September 30, 2015 and 2014, respectively.

 

(Dollars in thousands)    As of September 30, 2015      As of December 31, 2014  

IMPAIRED LOANS

                                         

With no related allowance:

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

Construction, land and land development

   $ 447       $ 451       $ —         $ 450       $ 452       $ —     

Residential First Mortgages

     2,164         2,193         —           1,568         1,584         —     

Residential Revolving and Junior Mortgages (1)

     50         50         —           50         50         —     

Commercial Mortgages (Non-owner occupied)

     264         264         —           264         264         —     

Commercial Mortgages (Owner occupied)

     1,353         1,389         —           1,887         1,916         —     

Commercial and Industrial

     —           —           —           —           —           —     

Consumer (2)

     2         2         —           5         5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     4,280         4,349         —           4,224         4,271         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                                         

Construction, land and land development

     267         292         126         277         292         144   

Residential First Mortgages

     1,739         1,739         273         2,173         2,173         437   

Residential Revolving and Junior Mortgages (1)

     245         245         141         173         173         84   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —           —           —     

Commercial Mortgages (Owner occupied)

     1,150         1,158         171         —           —           —     

Commercial and Industrial

     119         121         119         —           —           —     

Consumer (2)

     —           —           —           11         11         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,520         3,555         830         2,634         2,649         676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans:

                                         

Construction, land and land development

     714         743         126         727         744         144   

Residential First Mortgages

     3,903         3,932         273         3,741         3,757         437   

Residential Revolving and Junior Mortgages (1)

     295         295         141         223         223         84   

Commercial Mortgages (Non-owner occupied)

     264         264         —           264         264         —     

Commercial Mortgages (Owner occupied)

     2,503         2,547         171         1,887         1,916         —     

Commercial and Industrial

     119         121         119         —           —           —     

Consumer (2)

     2         2         —           16         16         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,800       $ 7,904       $ 830       $ 6,858       $ 6,920       $ 676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

14


Table of Contents
     For the three months ended
September 30, 2015
     For the three months ended
September 30, 2014
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

                           

Construction, land and land development

   $ 448       $ —         $ 451       $ 1   

Residential First Mortgages

     2,061         18         1,038         10   

Residential Revolving and Junior Mortgages (1)

     50         1         —           —     

Commercial Mortgages (Non-owner occupied)

     264         4         264         4   

Commercial Mortgages (Owner occupied)

     1,354         8         1,905         19   

Commercial and Industrial

     —           —           —           —     

Consumer (2)

     3         —           6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,180         31         3,664         34   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                           

Construction, land and land development

     268         1         426         1   

Residential First Mortgages

     1,741         21         2,181         26   

Residential Revolving and Junior Mortgages (1)

     209         2         173         2   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —     

Commercial Mortgages (Owner occupied)

     1,152         6         —           —     

Commercial and Industrial

     120         —           —           —     

Consumer (2)

     —           —           21         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,490         30         2,801         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

                           

Construction, land and land development

     716         1         877         2   

Residential First Mortgages

     3,802         39         3,219         36   

Residential Revolving and Junior Mortgages (1)

     259         3         173         2   

Commercial Mortgages (Non-owner occupied)

     264         4         264         4   

Commercial Mortgages (Owner occupied)

     2,506         14         1,905         19   

Commercial and Industrial

     120         —           —           —     

Consumer (2)

     3         —           27         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,670       $ 61       $ 6,465       $ 64   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

15


Table of Contents
     For the nine months ended
September 30, 2015
     For the nine months ended
September 30, 2014
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

                           

Construction, land and land development

   $ 449       $ —         $ 452       $ 2   

Residential First Mortgages

     1,813         53         1,043         31   

Residential Revolving and Junior Mortgages (1)

     50         2         —           —     

Commercial Mortgages (Non-owner occupied)

     264         12         264         12   

Commercial Mortgages (Owner occupied)

     1,036         20         1,917         61   

Commercial and Industrial

     —           —           —           —     

Consumer (2)

     4         —           7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,616         87         3,683         106   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                           

Construction, land and land development

     272         4         288         2   

Residential First Mortgages

     1,748         64         2,187         74   

Residential Revolving and Junior Mortgages (1)

     191         6         174         7   

Commercial Mortgages (Non-owner occupied)

     —           —           —           —     

Commercial Mortgages (Owner occupied)

     1,156         21         —           —     

Commercial and Industrial

     91         —           —           —     

Consumer (2)

     —           —           26         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,458         95         2,675         85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

                           

Construction, land and land development

     721         4         740         4   

Residential First Mortgages

     3,561         117         3,230         105   

Residential Revolving and Junior Mortgages (1)

     241         8         174         7   

Commercial Mortgages (Non-owner occupied)

     264         12         264         12   

Commercial Mortgages (Owner occupied)

     2,192         41         1,917         61   

Commercial and Industrial

     91         —           —           —     

Consumer (2)

     4         —           33         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,074       $ 182       $ 6,358       $ 191   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2015 and December 31, 2014, non-accruing loans excluded from impaired loan disclosure totaled $388 thousand and $663 thousand, respectively. If interest on these non-accruing loans had been accrued, such income would have approximated $1 thousand and $11 thousand during the three months ended September 30, 2015 and 2014, respectively, and $9 thousand and $23 thousand during the nine months ended September 30, 2015 and 2014, respectively.

 

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Table of Contents

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, 2015 and 2014.

 

    For the three months ended
September 30, 2015
    For the three months ended
September 30, 2014
 
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
(Dollars in thousands)         Outstanding     Outstanding           Outstanding     Outstanding  

TROUBLED DEBT RESTRUCTURINGS

  Number of
Loans
    Recorded
Investment
    Recorded
Investment
    Number of
Loans
    Recorded
Investment
    Recorded
Investment
 

Residential first mortgages (1)

    1      $ 213      $ 211        —        $ —        $ —     

 

(1) Modifications were an extension of loan terms.

 

    For the nine months ended
September 30, 2015
    For the nine months ended
September 30, 2014
 
          Pre-Modification     Post-Modification           Pre-Modification     Post-Modification  
(Dollars in thousands)         Outstanding     Outstanding           Outstanding     Outstanding  

TROUBLED DEBT RESTRUCTURINGS

  Number of
Loans
    Recorded
Investment
    Recorded
Investment
    Number of
Loans
    Recorded
Investment
    Recorded
Investment
 

Construction, land and land development (1)

    —        $ —        $ —          2      $ 282      $ 282   

Residential first mortgages (1)

    1        213        211        —          —          —     

Commercial mortgages (Owner occupied) (2)

    1        105        124        —          —          —     

 

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

 

(Dollars in thousands)    For the three months ended
September 30, 2015
     For the three months ended
September 30, 2014
 

TROUBLED DEBT RESTRUCTURINGS THAT SUBSEQUENTLY DEFAULTED

   Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 

None

     —         $ —           —         $ —     

 

(Dollars in thousands)    For the nine months ended
September 30, 2015
     For the nine months ended
September 30, 2014
 

TROUBLED DEBT RESTRUCTURINGS THAT SUBSEQUENTLY DEFAULTED

   Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 

Residential revolving and junior mortgages

     —         $ —           1       $ 75   

Commercial mortgages (Owner occupied)

     1         124         —           —     

Other Real Estate Owned

The table below details the properties included in other real estate owned (“OREO”) as of September 30, 2015 and December 31, 2014. There were no collateralized consumer residential mortgage loans in the process of foreclosure as of September 30, 2015.

 

     As of September 30, 2015      As of December 31, 2014  
(Dollars in thousands)    No. of
Properties
     Carrying
Value
     No. of
Properties
     Carrying
Value
 

Residential

     6       $ 910         10       $ 1,559   

Land lots

     7         442         13         587   

Convenience stores

     2         191         2         234   

Restaurant

     1         107         1         107   

Commercial properties

     3         693         1         304   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19       $ 2,343         27       $ 2,791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in other assets as of September 30, 2015, was one residential property purchased in 2013 from a related party with a value of $724 thousand and a former branch, which was closed April 30, 2015, with a value of $390 thousand. As of December 31, 2014, the residential property was included in other assets and had a value of $771 thousand. Both properties are being marketed for sale.

 

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, 2015      September 30, 2014      September 30, 2015      September 30, 2014  
     Average
Shares
     Per share
Amount
     Average
Shares
     Per share
Amount
     Average
Shares
     Per share
Amount
     Average
Shares
     Per share
Amount
 

Basic earnings per share

     4,780,649       $ 0.06         4,818,733       $ 0.11         4,797,405       $ 0.20         4,818,454       $ 0.26   

Effect of dilutive securities:

                       

Stock options

     15,359            9,552            13,724            12,601      
  

 

 

       

 

 

       

 

 

       

 

 

    

Diluted earnings per share

     4,796,008       $ 0.06         4,828,285       $ 0.11         4,811,129       $ 0.20         4,831,055       $ 0.26   
  

 

 

       

 

 

       

 

 

       

 

 

    

For the three months ended September 30, 2015 and 2014, options on 60,973 and 68,828 shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive. For the nine months ended September 30, 2015 and 2014, options of 68,473 and 68,828 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 370,500 shares available for grant under this plan at September 30, 2015.

Stock-based compensation expense related to stock awards was zero for both the three month periods ended September 30, 2015 and 2014 and during the nine month periods ended September 30, 2015 and 2014 was $17 thousand and $20 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, 2015.

Options for a total of 7,500 shares were granted and vested during the nine months ended September 30, 2015. The aggregate fair value of options granted during the nine months ended September 30, 2015 was $17 thousand. Options for a total of 7,000 shares were granted and vested during the nine months ended September 30, 2014. The aggregate fair value of options granted during the nine months ended September 30, 2014 was $20 thousand.

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

 

     For the nine months ended September 30,  
     2015     2014  

Risk free interest rate (5 year Treasury)

     1.52     1.74

Expected dividend yield

     0.0     0.0

Expected term (years)

     5        5   

Expected volatility

     47.1     51.4

Stock option activity for the nine months ended September 30, 2015 (unaudited) is summarized below:

 

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

Options outstanding, January 1, 2015

     190,419       $ 7.02         6.2      

Granted

     7,500         5.37         

Forfeited

     —           —           

Exercised

     —           —           

Expired

     (7,734      14.43         
  

 

 

          

Options outstanding and exercisable, September 30, 2015

     190,185       $ 6.66         5.8       $ 87,709   
  

 

 

    

 

 

       

 

 

 

 

(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, 2015. This amount changes based on changes in the market value of the Company’s common stock.

 

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 post-retirement 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  

Nine months ended September 30,

   2015      2014      2015      2014  

Service cost

   $ —         $ —         $ 17       $ 12   

Interest cost

     99         106         23         22   

Expected return on plan assets

     (148      (151      —           —     

Amortization of unrecognized net loss

     —           28         —           —     

Recognized net actuarial loss

     57         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic (benefit) cost

   $ 8       $ (17    $ 40       $ 34   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company expects to make no contribution to its pension plan and $2 thousand to its post-retirement benefit plan during the remainder of 2015. The Company has contributed $8 thousand towards the post-retirement plan during the first nine months of 2015.

 

Note 10: Long Term Debt

FHLB Debt

As of September 30, 2015 and December 31, 2014, the Bank had $30 million and $35 million of outstanding FHLB debt, respectively, consisting of five and six advances, respectively. A $5 million advance with a LIBOR-based floating rate advance which matured in May 2015 was replaced with a $5 million fixed rate advance, maturing in February 2016. In June 2015, a $5 million fixed rate advance was replaced with a $5 million LIBOR-based floating rate advance maturing in September 2016, and a $5 million fixed rate advance was repaid. The advanced which matured on October 20, 2015, was replaced with a $5 million, 0.52% fixed rate credit advance maturing on October 20, 2016.

The five advances are shown in the following table.

 

Description

   Balance      Originated      Current
Interest Rate
    Maturity
Date
 

Adjustable Rate Hybrid

   $ 10,000,000         4/12/2013         2.65590     4/13/2020   

Fixed Rate Credit

     5,000,000         10/20/2014         0.47000     4/20/2016   

Fixed Rate Credit

     5,000,000         10/20/2014         0.30000     10/20/2015   

Fixed Rate Credit

     5,000,000         5/20/2015         0.37000     2/22/2016   

Adjustable Rate Credit

     5,000,000         6/18/2015         0.30080     9/19/2016   
  

 

 

         
   $ 30,000,000           
  

 

 

         

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, 2015, was $48.7 million against a total line of credit of $82.7 million.

As of September 30, 2015 and December 31, 2014, the Company had $30.0 million and $35.0 million, respectively, in FHLB debt outstanding with a weighted average interest rate of 1.13% and 0.96%, respectively.

Subordinated Debt

On May 28, 2015, the Company entered into a Subordinated Note Purchase Agreement (the “Purchase Agreement”) with 29 accredited investors under which the Company issued an aggregate of $7,000,000 of subordinated notes (the “Notes”) to the accredited investors. The Notes have a maturity date of May 28, 2025. The Notes bear interest, payable on the 1st of March and September of each year, commencing September 1, 2015, at a fixed interest rate of 6.50% per year. The Notes are not convertible into common stock or preferred stock, and are not callable by the holders. The Company has the right to redeem the Notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a Note may declare the principal amount of the Note to be due and immediately payable. The Notes are unsecured, subordinated obligations of the Company and will rank junior in right of payment to the Company’s existing and future senior indebtedness. The Notes qualify as Tier 2 capital for regulatory reporting.

 

(Dollars in thousands)    Balance as of
September 30, 2015
 

6.5% Subordinated Debt

   $ 7,000   

Less: Issuance costs

     (161
  

 

 

 
   $ 6,839   
  

 

 

 

Bank Dividends

One source of funds available to the Company is the payment of dividends by the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval from the Bank’s regulators.

 

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Note 11. Regulatory Capital Requirements and Restrictions

In July 2013, the Board of Governors of the Federal Reserve System issued final rules that made technical changes to its capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Bank to comply with the following minimum capital ratios: (i) a new Common Equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). The following additional capital requirements related to the capital conservation buffer will be phased in over a four year period beginning January 1, 2016. When fully phased in on January 1, 2019, the rules will require the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2015 and December 31, 2014, are presented in the following tables:

 

                               Minimum  
                               To Be Well  
                               Capitalized Under  
                  Minimum     Prompt Corrective  
     Actual     Capital Requirement     Action Provisions  
(Dollars in Thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2015:

                                       

Total Risk Based Capital (to Risk Weighted Assets)

               

Consolidated

   $ 49,249         16.19   $ 24,330         8.00     N/A         N/A   

Bank of Lancaster

     41,769         13.84     24,136         8.00   $ 30,171         10

Tier 1 Capital (to Risk Weighted Assets)

               

Consolidated

     39,036         12.84     12,165         4.00     N/A         N/A   

Bank of Lancaster

     38,395         12.73     12,068         4.00   $ 18,102         6

Common Equity Tier 1 Capital (to Risk Weighted Assets)

               

Consolidated

               

Bank of Lancaster

     39,036         12.84     12,165         4.00     N/A         N/A   
     38,395         12.73     12,068         4.00   $ 15,085         5

Tier 1 Capital (to Average Assets)

               

Consolidated

               

Bank of Lancaster

     39,036         9.16     17,042         4.00     N/A         N/A   
     38,395         9.19     16,712         4.00   $ 20,890         5

 

                               Minimum  
                               To Be Well  
                               Capitalized Under  
                  Minimum     Prompt Corrective  
     Actual     Capital Requirement     Action Provisions  
(Dollars in Thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of December 31, 2014:

                                       

Total Risk Based Capital (to Risk Weighted Assets)

               

Consolidated

   $ 41,445         15.02   $ 22,074         8.00     N/A         N/A   

Bank of Lancaster

     36,446         13.30     21,927         8.00   $ 27,409         10

Tier 1 Capital (to Risk Weighted Assets)

               

Consolidated

     38,240         13.86     11,037         4.00     N/A         N/A   

Bank of Lancaster

     33,241         12.13     10,964         4.00   $ 16,445         6

Tier 1 Capital (to Average Assets)

               

Consolidated

     38,240         10.36     14,770         4.00     N/A         N/A   

Bank of Lancaster

     33,241         9.07     14,664         4.00   $ 18,329         5

 

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Note 12: 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.

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 results of operations. A model is used to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool and applies a discount rate to each pool. Loans are segregated into 14 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Service costs were assumed to be $6.00 per loan as of September 30, 2015 and $5.75 per loan as of December 31, 2014. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining loan balance. The average PSA speed assumption in the fair value model is 173% and 184% as of September 30, 2015 and December 31, 2014, respectively. A discount rate of 11.0% was then applied to each pool as of September 30, 2015 and 10.0% as of December 31, 2014. This discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSRs are classified as Level 3.

 

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:

 

(Dollars in thousands)         Fair Value Measurements at September 30, 2015 Using  

Description

  Balance     Level 1     Level 2     Level 3  

Securities available-for-sale:

       

Corporate bonds

  $ 700      $ —        $ —        $ 700   

U. S. Government agencies

    23,136        1,428        21,708        —     

State and municipal obligations

    24,562        —          24,562        —     

Certificates of deposit

    5,497        —          5,249        248   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale:

  $ 53,895      $ 1,428      $ 51,519      $ 948   
 

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

  $ 642      $ —        $ —        $ 642   

Defined benefit plan assets:

       

Cash and cash equivalents

  $ 3      $ 3      $ —        $ —     

Mutual funds - fixed income

    1,613        1,613        —          —     

Mutual funds - equity

    1,125        1,125        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit plan assets

  $ 2,741      $ 2,741      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 
          Fair Value Measurements at December 31, 2014 Using  

Description

  Balance     Level 1     Level 2     Level 3  

Securities available-for-sale:

       

U. S. Government agencies

  $ 16,965      $ 845      $ 16,120      $ —     

State and municipal obligations

    23,401        —          23,401        —     

Certificates of deposit

    2,238        —          2,238        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale:

  $ 42,604      $ 845      $ 41,759      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

  $ 596      $ —        $ —        $ 596   
 

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit plan assets:

       

Cash and cash equivalents

  $ 4      $ 4      $ —        $ —     

Mutual funds - fixed income

    1,139        1,139        —          —     

Mutual funds - equity

    1,754        1,754        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit plan assets

  $ 2,897      $ 2,897      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

            Corporate      Certificates of  
(Dollars in thousands)    MSRs      Bonds      Deposit  

Balance, January 1, 2015

   $ 596       $ —         $ —     

Purchases

     —           700         248   

Impairments

     —           —           —     

Fair value adjustments

     46         —           —     

Sales

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance, September 30, 2015

   $ 642       $ 700       $ 248   
  

 

 

    

 

 

    

 

 

 

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.

 

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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, 2015 Using  
(Dollars in thousands)   Balance as of                    

Description

  September 30, 2015     Level 1     Level 2     Level 3  

Impaired Loans, net

  $ 2,690      $ —        $ —        $ 2,690   

Other real estate owned, net

    2,343        —          —          2,343   
          Fair Value Measurements at December 31, 2014 Using  
    Balance as of                    

Description

  December 31, 2014     Level 1     Level 2     Level 3  

Impaired Loans, net

  $ 1,958      $ —        $ —        $ 1,958   

Other real estate owned, net

    2,791        —          —          2,791   

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

 

                      Range  
    Balance as of     Valuation     Unobservable     (Weighted  
(Dollars in thousands)   September 30, 2015     Technique     Input     Average)  

Impaired Loans, net

  $ 2,690        Discounted appraised value        Selling Cost        10% - 25% (13%
        Lack of Marketability        25% - 75% (52%

Other real estate owned, net

    2,343        Discounted appraised value        Selling Cost        3% - 13% (5%
        Lack of Marketability        7% - 20% (10%

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

 

                      Range  
    Balance as of     Valuation     Unobservable     (Weighted  
(Dollars in thousands)   December 31, 2014     Technique     Input     Average)  

Impaired Loans, net

  $ 1,958        Discounted appraised value        Selling Cost        10% - 20% (10%
        Lack of Marketability        25% - 75% (53%

Other real estate owned, net

    2,791        Discounted appraised value        Selling Cost        3% - 13% (5%
        Lack of Marketability        7% - 20% (11%

 

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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, 2015 Using  
(Dollars in thousands)   Balance as of     Fair Value as of                    

Description

  September 30, 2015     September 30, 2015     Level 1     Level 2     Level 3  

Financial Assets:

         

Cash and due from banks

  $ 5,424      $ 5,424      $ 5,424      $ —        $ —     

Interest-bearing deposits

    7,578        7,578        7,578        —          —     

Federal funds sold

    466        466        466        —          —     

Securities available-for-sale

    53,895        53,895        1,428        51,519        948   

Restricted securities

    2,261        2,261        —          —          2,261   

Loans, net

    329,231        336,077        —          —          336,077   

Loans held for sale

    1,182        1,182        —          —          1,182   

Accrued interest receivable

    1,207        1,207        —          1,207        —     

Mortgage servicing rights

    642        642        —          —          642   

Financial Liabilities:

         

Non-interest-bearing liabilities

  $ 61,609      $ 61,609      $ 61,609      $ —        $ —     

Savings and other interest-bearing deposits

    159,274        159,274        —          159,274        —     

Time deposits

    118,501        119,471        —          —          119,471   

Securities sold under repurchase agreements

    10,491        10,491        —          10,491        —     

FHLB advances

    30,000        30,910        —          30,910        —     

Subordinated debt

    6,839        6,839        —          —          6,839   

Accrued interest payable

    204        204        —          204        —     

 

                Fair Value Measurements at December 31, 2014 Using  
(Dollars in thousands)   Balance as of     Fair Value as of                    

Description

  December 31, 2014     December 31, 2014     Level 1     Level 2     Level 3  

Financial Assets:

         

Cash and due from banks

  $ 6,181      $ 6,181      $ 6,181      $ —        $ —     

Interest-bearing deposits

    14,784        14,784        14,784        —          —     

Federal funds sold

    119        119        119        —          —     

Securities available-for-sale

    42,604        42,604        845        41,759        —     

Restricted securities

    2,430        2,430        —          —          2,430   

Loans, net

    295,242        300,481        —          —          300,481   

Accrued interest receivable

    1,197        1,197        —          1,197        —     

Mortgage servicing rights

    596        596        —          —          596   

Financial Liabilities:

         

Non-interest-bearing liabilities

  $ 63,308      $ 63,308      $ 63,308      $ —        $ —     

Savings and other interest-bearing deposits

    122,502        122,502        —          122,502        —     

Time deposits

    121,775        122,662        —          —          122,662   

Securities sold under repurchase agreements

    6,012        6,012        —          6,012        —     

FHLB advances

    35,000        35,951        —          35,951        —     

Accrued interest payable

    149        149        —          149        —     

The carrying amounts of cash and due from banks, interest-bearing deposits, federal funds sold or purchased, accrued interest receivable, 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 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.

The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer.

MSRs are carried at fair value. As described above, a valuation model is used to determine fair value. This model utilizes a discounted cash flow analysis with servicing costs and prepayment assumptions based on comparable instruments and a discount rate.

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.

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

As a result of being issued and sold at the end of May 2015, the fair value of the Company’s subordinated debt is estimated at its sales price of par less issuance costs.

 

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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, 2015 and December 31, 2014, 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 13: Changes in Accumulated Other Comprehensive Income (Loss)

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

 

     For the Three Months Ended September 30, 2015  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      Income (Loss)  

Balance July 1, 2015

   $ (130    $ (966    $ (1,096

Change in net unrealized holding losses on securities, before reclassification, net of tax expense of $136

     267         —           267   

Reclassification for previously unrealized net gains recognized in income, net of tax expense of $0

     (2      —           (2
  

 

 

    

 

 

    

 

 

 

Balance September 30, 2015

   $ 135       $ (966    $ (831
  

 

 

    

 

 

    

 

 

 

 

     For the Three Months Ended September 30, 2014  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      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
  

 

 

    

 

 

    

 

 

 

 

     For the Nine Months Ended September 30, 2015  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      Income (Loss)  

Balance January 1, 2015

   $ 45       $ (966    $ (921

Change in net unrealized holding losses on securities, before reclassification, net of tax expense of $47

     93         —           93   

Reclassification for previously unrealized net gains recognized in income, net of tax expense of $1

     (3      —           (3
  

 

 

    

 

 

    

 

 

 

Balance September 30, 2015

   $ 135       $ (966    $ (831
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     For the Nine Months Ended September 30, 2014  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      Income (Loss)  

Balance January 1, 2014

   $ (791    $ (382    $ (1,173

Change in net unrealized holding gains 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
  

 

 

    

 

 

    

 

 

 

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, 2015 and 2014.

 

Accumulated Other Comprehensive Income (Loss)

Reclassification for the Three Months Ended

Holding Losses on Securities

 
(In thousands)    September 30, 2015      September 30, 2014  

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

   $ 2       $ (8

Tax (expense) benefit

     —           3   
  

 

 

    

 

 

 

Impact on net income

   $ 2       $ (5
  

 

 

    

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

Reclassification for the Nine Months Ended

Holding Losses on Securities

 
(In thousands)    September 30, 2015      September 30, 2014  

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

   $ 4       $ (25

Tax (expense) benefit

     (1      9   
  

 

 

    

 

 

 

Impact on net income

   $ 3       $ (16
  

 

 

    

 

 

 

 

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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 for the first nine months of 2015 are highlighted by the success of the Company’s expansion into the Richmond, Virginia market and the completion of a $7.0 million subordinated debt offering in May 2015. In March 2015, the Bank opened a third retail branch in the Richmond market in Chesterfield County. In June 2015, the Bank converted its Hartfield, Virginia loan production office into a retail office. This office is located in Middlesex County. Core earnings and growth remain priorities. The capital position remains solid.

Total assets have grown by $39.5 million, or 10.1%, during the first nine months of 2015, to $430.0 million. Two of the three new Richmond branches currently have negative contributions to earnings, causing the year-over-year decline in net income to $956 thousand from $1.2 million. The impact of these negative contributions are declining and management anticipates those branches to begin providing positive contributions by mid-year 2016. However, net interest income, which management considers to be a component of core earnings, grew by $1.1 million for the nine-month period ended September 30, 2015 compared to the comparable 2014 period. Return on average assets was 0.31% for the first nine months of 2015 compared to 0.49% for the same period in 2014. Return on average equity was 3.23% for the first nine months of 2015 compared to 4.32% for the same period in 2014.

The in-house loan portfolio grew by $34.1 million, or 11.4%, during the first nine months of 2015. Loans originated and sold to Fannie Mae generated growth of $5.9 million in the portfolio of loans serviced for Fannie Mae since December 31, 2014. The servicing portfolio totals $70.6 million as of September 30, 2015 compared to $64.7 million as of December 31, 2014 and $63.8 million as of September 30, 2014.

In April 2015, the Bank consolidated the branch operations of its three Lancaster County, Virginia offices into two offices, with all Kilmarnock branch operations now based in the main office of the Bank. The branch consolidation is expected to save the Company approximately $85 thousand annually. The branch building, located at 432 N. Main Street, Kilmarnock, Virginia, is for sale.

The net interest margin decreased to 3.49% for the first nine months of 2015 compared to 3.85% for the same period in 2014. As this low rate environment continues, loan and investment yields continue to decline, but increased loan balances have resulted in increased interest income, resulting in the improved net interest income noted above.

Finally, the Company’s core capital levels and regulatory ratios remain well above what is considered “well capitalized” by the Company’s regulators.

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.

EARNINGS SUMMATION

For the three months ended September 30, 2015 and 2014, net income was $281 thousand and $512 thousand, respectively, a decrease of $231 thousand or 45.1% from 2015 to 2014. Diluted earnings per average share for the three months ended September 30, 2015 and 2014 were $0.06 and $0.11, respectively. Factors driving this decrease included negative contributions from two of the three new Richmond branches as noted above, related personnel expense for support functions, decreases in non-deposit product income and losses in OREO. Annualized return on average assets was 0.26% for the three months ended September 30, 2015 compared to 0.59% for the three months ended September 30, 2014. Annualized return on average equity was 2.82% and 5.29% for the three months ended September 30, 2015 and 2014, respectively.

For the nine months ended September 30, 2015 and 2014, net income was $956 thousand and $1.2 million, respectively, a decrease of $276 thousand or 22.4% from 2015 to 2014. Diluted earnings per average share for the nine months ended September 30, 2015 and 2014 were $0.20 and $0.26, respectively. Factors driving this decrease included negative contributions from two of the three new Richmond branches

 

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as noted above, related personnel expense for support functions as noted above, a gain on the sale of a former branch office during the first quarter of 2014 and decreases in non-deposit product income. Annualized return on average assets was 0.31% for the nine months ended September 30, 2015 compared to 0.49% for the nine months ended September 30, 2014. Annualized return on average equity was 3.23% and 4.32% for the nine months ended September 30, 2015 and 2014, 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 assets which earn interest. Changes in the volume and mix of assets which earn interest and liabilities that bear interest, 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, 2015 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2014

NET INTEREST INCOME

 

Net Interest Income Analysis    Average Balances, Income and Expense, Yields and Rates  
(Fully taxable equivalent basis)                                         
(Dollars in thousands)    Three months ended 9/30/2015     Three months ended 9/30/14  
     Average
Balance
     Income/
Expense
     Yield/ Cost     Average
Balance
     Income/
Expense
     Yield/ Cost  

INTEREST EARNING ASSETS:

                

Taxable investments

   $ 32,477       $ 159         1.94   $ 20,684       $ 93         1.81

Tax-exempt investments (1)

     19,428         155         3.19     17,601         139         3.16
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     51,905         314         2.40     38,285         232         2.43

Gross loans (2)

     325,166         3,810         4.68     266,192         3,323         4.98

Interest-bearing deposits

     18,949         9         0.21     12,511         7         0.23

Federal funds sold

     1,203         —           0.07     287         —           0.05
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Earning Assets

   $ 397,223       $ 4,133         4.16   $ 317,275       $ 3,562         4.49
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST-BEARING LIABILITIES:

                

Savings deposits

   $ 41,835       $ 19         0.18   $ 42,464       $ 16         0.15

NOW deposits

     40,772         15         0.15     42,590         16         0.15

Time deposits => $100,000

     56,042         215         1.52     43,622         193         1.75

Time deposits < $100,000

     57,134         207         1.44     50,750         197         1.54

Time deposits - Wholesale

     6,387         6         0.39     1,841         2         0.53

Money market deposit accounts

     75,676         181         0.95     31,079         32         0.40
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Deposits

     277,846         643         0.92     212,346         456         0.85

Federal funds purchased

     327         —           0.67     —           —           0.00

Securities sold under repurchase agreements

     9,728         4         0.18     7,898         3         0.11

FHLB advances

     30,000         87         1.15     25,000         76         1.21

Subordinated notes

     6,840         119         6.96     —           —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-Bearing Liabilities

   $ 324,741       $ 853         1.04   $ 245,244       $ 535         0.86
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income and net interest margin

      $ 3,280         3.30      $ 3,027         3.82
     

 

 

         

 

 

    

Non-interest-bearing deposits

   $ 60,658         —           0.00   $ 60,238         —           0.00

Total Cost of funds

           0.89           0.70

Net interest rate spread

           3.28           3.79

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, 2015, on a tax-equivalent basis, was $4.1 million, an increase of $571 thousand from the third quarter of 2014, due mainly to increases in loan balances. Interest expense for the three months ended September 30, 2015 was $853 thousand, an increase of $318 thousand from the third quarter of 2014, due primarily to increases in money market deposits in Richmond, which supported the loan growth, and the interest associated with the subordinated notes that were issued in May 2015. Net interest income for the three months ended September 30, 2015, on a tax-equivalent basis, was $3.3 million, an increase of $253 thousand from the third quarter of 2014.

The annualized net interest margin was 3.30% and 3.82% for the three months ended September 30, 2015 and 2014, respectively. This period to period decline is due to continued reductions in loan yields, to 4.68% for the third quarter of 2015 from 4.98% for the third quarter of 2014, as market rates remain historically low and new loans are made at rates lower than existing loans. The cost of funds increased slightly to 0.89% for the third quarter of 2015 from 0.70% for the third quarter of 2014, a result of new money market products with higher rates and the issuance of 6.50% subordinated debt in May 2015.

 

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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, decreased to 3.28% for the three months ended September 30, 2015, compared to 3.79% for the three months ended September 30, 2014.

NON-INTEREST INCOME

Non-interest income for the three months ended September 30, 2015 decreased by $297 thousand, or 27.8%, compared to the three months ended September 30, 2014. Contributing to this decline was a decrease of $132 thousand in non-deposit product income, increased losses on OREO properties to $167 thousand in 2015 from $60 thousand in 2014 and an decrease in secondary market lending income of $42 thousand.

NON-INTEREST EXPENSE

For the three months ended September 30, 2015 and 2014, non-interest expenses totaled $3.6 million and $3.2 million, respectively. The increase in non-interest expense was due primarily to an increase of $306 thousand in salaries and benefits, which was driven by an increase in employees for the new Richmond offices and related support functions. Occupancy expense increased in 2015 by $109 thousand primarily due to the two new branches in Richmond which opened in the fourth quarter of 2014 and the end of the first quarter of 2015.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2014

NET INTEREST INCOME

 

Net Interest Income Analysis    Average Balances, Income and Expense, Yields and Rates  
(Fully taxable equivalent basis)                                         
(Dollars in Thousands)    Nine months ended 9/30/2015     Nine months ended 9/30/14  
     Average
Balance
     Income/
Expense
     Yield/ Cost     Average
Balance
     Income/
Expense
     Yield/ Cost  

INTEREST EARNING ASSETS:

                

Taxable investments

   $ 29,739       $ 434         1.94   $ 20,840       $ 272         1.74

Tax-exempt investments (1)

     17,450         418         3.20     18,545         433         3.11
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     47,189         852         2.40     39,385         705         2.39

Gross loans (2)

     312,301         11,200         4.78     258,481         9,763         5.04

Interest-bearing deposits

     19,002         30         0.22     8,865         15         0.25

Federal funds sold

     830         —           0.06     301         —           0.06
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Earning Assets

   $ 379,322       $ 12,082         4.25   $ 307,032       $ 10,483         4.55
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST-BEARING LIABILITIES:

                

Savings deposits

   $ 43,058       $ 57         0.18   $ 43,454       $ 50         0.15

NOW deposits

     41,570         47         0.15     42,437         47         0.15

Time deposits => $100,000

     55,910         637         1.52     40,178         520         1.73

Time deposits < $100,000

     56,789         608         1.43     54,332         658         1.62

Time deposits - Wholesale

     7,347         21         0.39     753         3         0.53

Money market deposit accounts

     57,501         359         0.83     28,396         85         0.40
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Deposits

     262,175         1,729         0.88     209,550         1,363         0.87

Federal funds purchased

     109         —           0.68     121         1         0.58

Securities sold under repurchase agreements

     7,736         8         0.14     7,836         7         0.11

FHLB advances

     33,241         259         1.04     18,667         261         1.87

Subordinated notes

     3,114         161         6.91     —           —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-Bearing Liabilities

   $ 306,375       $ 2,157         0.94   $ 236,174       $ 1,632         0.92
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income and net interest margin

      $ 9,925         3.49      $ 8,851         3.84
     

 

 

         

 

 

    

Non-interest-bearing deposits

   $ 61,133         —           0.00   $ 58,568         —           0.00

Total Cost of funds

           0.78           0.74

Net interest rate spread

           3.47           3.82

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, 2015, on a tax-equivalent basis, was $12.1 million, an increase of $1.6 million from the same period of 2014, due primarily to the growth in loan balances. Interest expense for the nine months ended September 30, 2015 was $2.2 million, an increase of $525 thousand from the same period of 2014. Net interest income for the nine months ended September 30, 2015, on a tax-equivalent basis, was $9.9 million, an increase of $1.1 million from the same period in 2014.

The annualized net interest margin was 3.49% and 3.84% for the nine months ended September 30, 2015 and 2014, respectively. This period to period decline is due to continued reductions in loan yields, to 4.78% for the first nine months of 2015 from 5.04% for the first nine months of 2014, as market rates remain historically low and new loans are made at lower rates than existing loans. The cost of funds is slightly higher for the first nine months of 2015 compared to the first nine months of 2014 to 0.78% from 0.74%.

 

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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, decreased to 3.47% for the nine months ended September 30, 2015, compared to 3.82% for the nine months ended September 30, 2014.

NON-INTEREST INCOME

Non-interest income for the nine months ended September 30, 2015 decreased by $232 thousand, or 8.3%, compared to the nine months ended September 30, 2014. Contributing to this decrease was a decline of $123 thousand in non-deposit product income and a gain of $138 thousand was recognized on the sale of a former branch office in the first quarter of 2014.

NON-INTEREST EXPENSE

For the nine months ended September 30, 2015 and 2014, non-interest expenses totaled $10.8 million and $9.5 million, respectively. The increase in non-interest expense was due primarily to an increase of $1.0 million in salaries and benefits, as a result of additional personnel for the new Richmond offices and related support functions. Occupancy expense increased in 2015 by $274 thousand primarily due to $199 thousand related to the new branches in Richmond.

AVERAGE INTEREST-EARNINGS ASSETS AND AVERAGE INTEREST-BEARING LIABILITIES

Average interest-earning assets increased 23.5% to $379.3 million for the nine months ended September 30, 2015, as compared to $307.0 million for the nine months ended September 30, 2014, due to growth of $53.8 million in average loans. Average interest-earning assets as a percent of total average assets were 92.5% for the nine months ended September 30, 2015 as compared to 91.6% for the same period in 2014. The loan portfolio, with $312.3 million in average balances as of September 30, 2015, is the largest category of interest-earning assets.

Average interest-bearing liabilities increased 29.7% to $306.4 million for the nine months ended September 30, 2015, as compared to $236.2 million for the nine months ended September 30, 2014, due primarily to the growth in deposits from the new Richmond branches. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $120.0 million for the nine months ended September 30, 2015, up from $95.3 million for the similar period in 2014.

ASSET QUALITY

Asset quality remains good. Loans charged off during the first nine months of 2015, net of recoveries, totaled $185 thousand compared to $226 thousand for the first nine months of 2014. This represents a decline in the annualized net charge-off ratio to 0.08% for the first nine months of 2015 compared to 0.12% for the first nine months of 2014, 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 1.01% of total loans at September 30, 2015 and 1.07% at December 31, 2014. The reduction is due to declines in both the specific and general components of the ALL. Historical loss factors are lower and qualitative factors have improved.

Non-performing assets, which include OREO and non-performing loans, increased by $1.4 million to $6.2 million, or 1.4% of total assets as of September 30, 2015 compared to 1.2% as of December 31, 2014. This increase is primarily related to an increase of $1.4 million in non-accruing loans, a result of one loan relationship moved to non-accruing status, which was already identified as impaired.

 

Non-Performing Assets

 
(Dollars in thousands)   September 30, 2015     December 31, 2014  

Loans past due 90 days or more and still accruing

  $ 477      $ 14   

Non-accruing loans

    3,357        1,954   
 

 

 

   

 

 

 

Total non-performing loans

    3,834        1,968   
 

 

 

   

 

 

 

Other real estate owned

    2,343        2,791   
 

 

 

   

 

 

 

Total non-performing assets

  $ 6,177      $ 4,759   
 

 

 

   

 

 

 

Allowance for loan losses

  $ 3,374      $ 3,205   
 

 

 

   

 

 

 

Allowance to non-performing loans

    88.0     162.9

Non-performing assets to total assets

    1.4     1.2

Classified assets, which include loans with risk rating grades of substandard, doubtful and loss, plus OREO, decreased by $437 thousand during the first nine months of 2015 to $8.6 million, or 20.2% 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, 2015, loans valued at $7.8 million were considered impaired, whereas $6.9 million were considered impaired as of December 31, 2014. Between December 31, 2014 and September 30, 2015, seven loans were identified as impaired, one was dispensed through foreclosure and charged-off, two were paid off and one was moved into the pool of loans for collective evaluation of impairment. Management has reviewed the impaired credits and the underlying collateral and the current losses have been specifically reserved.

 

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FINANCIAL CONDITION

Total assets increased to $430.0 million as of September 30, 2015 compared to $390.5 million as of December 31, 2014. Cash and due from banks, which produces no income, was $5.4 million and $6.2 million on September 30, 2015 and December 31, 2014, 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 $7.2 million since year end 2014 primarily as a result of the cash being redeployed into loans.

During the nine months ended September 30, 2015, gross loans increased by $34.2 million or 11.5%, to $332.3 million from $298.1 million at year-end 2014. The largest components of this increase were $20.7 million related to residential first mortgages, $11.7 million related to commercial mortgages and $1.5 million related to construction, land and land development loans.

The Bank had $2.3 million and $2.8 million of OREO at September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, OREO consists of six residences, seven lots, two former convenience stores, one former restaurant and three commercial business properties. During the first nine months of 2015, three properties with a book value of $437 thousand from three borrowers were added through foreclosure, and 11 properties with a total book value of $726 thousand were sold. There were $159 thousand of write-downs of OREO properties during the first nine months of 2015, compared to $187 thousand for the same period in 2014. 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.

As of September 30, 2015, securities available-for-sale at fair value totaled $53.9 million as compared to $42.6 million on December 31, 2014. This represents a net increase of $11.3 million or 26.5% for the nine months. As of September 30, 2015, available-for-sale securities represented 12.5% of total assets and 13.7% 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. 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.

During 2013 and 2014, the Company purchased $7.0 million of bank owned life insurance in order to offset the cost of employee benefits. The bank owned life insurance’s cash surrender value as of September 30, 2015 was $7.5 million.

As of September 30, 2015, total deposits were $339.4 million compared to $307.6 million at year-end 2014. This represents an increase in balances of $31.8 million or 10.3% during the nine months. The increase was driven by a $40.8 million increase in money market accounts, offset by decreases of $3.5 million in savings accounts, $1.7 million in noninterest-bearing deposits, $3.2 million in time deposits and $573 thousand in interest bearing demand deposits. Deposit balances include $5.0 million of brokered time deposits, $3.0 million of brokered money market accounts and $1.0 million of internet certificates of deposit. The increase in money market is primarily the result of promotional rates for the Richmond market.

FHLB balances have declined by $5.0 million since December 31, 2014, to $30.0 million as of September 30, 2015.

On May 28, 2015, the Company entered into a Purchase Agreement with 29 accredited investors under which the Company issued an aggregate of $7,000,000 of subordinated notes to the accredited investors. The Notes have a maturity date of May 28, 2025. The Notes bear interest, payable on the 1st of March and September of each year, commencing September 1, 2015, at a fixed interest rate of 6.50% per year. The Notes are not convertible into common stock or preferred stock, and are not callable by the holders. The Company has the right to redeem the Notes, in whole or in part, without premium or penalty, on any interest payment date on or after May 28, 2020 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a Note may declare the principal amount of the Note to be due and immediately payable. The Notes are unsecured, subordinated obligations of the Company and will rank junior in right of payment to the Company’s existing and future senior indebtedness. The Notes qualify as Tier 2 capital for regulatory reporting.

As of September 30, 2015, securities sold under repurchase agreements increased by $4.5 million to $10.5 million from $6.0 million at December 31, 2014. This increase 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, 2015, cash totaled $5.4 million, federal funds sold totaled $466 thousand, interest-bearing deposits totaled $7.6 million, securities maturing in one year or less totaled $5.1 million and loans maturing in one year or less totaled $28.0 million. This results in a liquidity ratio as of September 30, 2015 of 10.8% as compared to 11.7% as of December 31, 2014. 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.

 

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In addition, the Company has a line of credit with the FHLB of $82.7 million, with $48.7 million available, plus federal funds lines of credit with correspondent banks totaling $21.5 million.

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 and 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 $40.9 million on September 30, 2015 compared to $40.2 million on December 31, 2014. Accumulated other comprehensive loss decreased by $90 thousand between December 31, 2014 and September 30, 2015, primarily as a result of decreases in unrealized net losses in the investment portfolio. During the nine months ended September 30, 2015, the Company repurchased 43,000 shares of its common stock for $243 thousand.

Book value per share, before accumulated other comprehensive loss, on September 30, 2015, compared to December 31, 2014, increased to $8.56 from $8.34. Book value per share, including accumulated other comprehensive loss, increased to $8.39 on September 30, 2015 from $8.14 on December 31, 2014. No cash dividends were paid for the nine month period ended September 30, 2015, nor for the comparable period ended September 30, 2014.

The Bank is subject to minimum regulatory capital ratios as defined by the Board of Governors of the Federal Reserve System. As of September 30, 2015, the Bank’s capital ratios continue to be well in excess of regulatory minimums.

In July 2013, the Board of Governors of the Federal Reserve System issued final rules that made technical changes to its capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Bank to comply with the following minimum capital ratios: (i) a new Common Equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). The following additional capital requirements related to the capital conservation buffer will be phased in over a four year period beginning January 1, 2016. When fully phased in on January 1, 2019, the rules will require the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. As of September 30, 2015, the Bank maintained Common Equity Tier 1 capital of $39.4 million, Tier 1 capital of $38.4 million, risk weighted assets of $301.7 million, and total capital of $41.8 million. As of September 30, 2015, all ratios were in excess of the fully phased-in requirements, with the Common Equity Tier 1 ratio at 12.73% of risk-weighted assets, the Tier 1 capital ratio at 12.73% of risk-weighted assets, the total capital ratio at 13.84% of risk-weighted assets, and the Tier 1 leverage ratio at 9.19% of total assets.

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.

 

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Off Balance Sheet Arrangements

 
     September 30, 2015      December 31, 2014  
(Dollars in thousands)              

Total loan commitments outstanding

   $ 44,589       $ 36,443   

Standby-by letters of credit

     431         355   

Low income housing tax credit fund

     499         —     

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, 2014.

CONTRACTUAL OBLIGATIONS

Other than with respect to the issuance of an aggregate of $7.0 million of subordinates notes on May 28, 2015, 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, 2014. Information on the issuance of the subordinated notes is included in the Company’s Current Report on Form 8-K filed on June 2, 2015.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 3, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, 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, 2015.

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, 2015 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.

 

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

On December 17, 2014, the Company announced a share repurchase program pursuant to which it is authorized to repurchase up to 240,892 shares of its common stock. The share repurchase program is authorized to last through December 31, 2015. The table below provides information on share repurchases made during the third quarter of 2015.

 

                   Total Number      Maximum Number  
                   of Shares      of Shares That  
                   Purchased as      May Yet Be  
     Total Number      Average      Part of Publicly      Purchased Under  
     of Shares      Price Paid      Announced Plans      the Plans or  
     Purchased      Per Share      or Program      Program  

July 1-31, 2015

     —         $ —           —           —     

August 1-31, 2015

     13,000         5.75         43,000         197,892   

September 1-30, 2015

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13,000       $ 5.75         43,000         197,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None to report.

 

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, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2015, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, 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 12, 2015       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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