Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - AMERICAN NATIONAL BANKSHARES INC.amnb-03312017xexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN NATIONAL BANKSHARES INC.amnb-03312017xexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN NATIONAL BANKSHARES INC.amnb-03312017xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN NATIONAL BANKSHARES INC.amnb-03312017xexhibit311.htm
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 March 31, 2017.
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO           .

Commission file number:  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)
VIRGINIA
 
54-1284688
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
628 Main Street
 
 
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.
Yes
x
No
o
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer", "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
 
At May 2, 2017, the Company had 8,638,744 shares of Common Stock outstanding, $1 par value.



AMERICAN NATIONAL BANKSHARES INC.
Index
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
American National Bankshares Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
 
 
 
Assets
(Unaudited)
March 31, 2017
 
(*) December 31, 2016
Cash and due from banks
$
27,418

 
$
20,268

Interest-bearing deposits in other banks
67,372

 
32,939

 
 
 
 
Securities available for sale, at fair value
292,567

 
346,502

Restricted stock, at cost
5,492

 
6,224

Loans held for sale
1,872

 
5,996

 
 
 
 
Loans, net of unearned income
1,219,958

 
1,164,821

Less allowance for loan losses
(13,108
)
 
(12,801
)
Net loans
1,206,850

 
1,152,020

 
 
 
 
Premises and equipment, net
25,658

 
25,439

Other real estate owned, net of valuation allowance $199 in 2017 and $192 in 2016
1,664

 
1,328

Goodwill
43,872

 
43,872

Core deposit intangibles, net
1,554

 
1,719

Bank owned life insurance
18,270

 
18,163

Accrued interest receivable and other assets
23,216

 
24,168

Total assets
$
1,715,805

 
$
1,678,638

 
 
 
 
Liabilities
 

 
 

Demand deposits -- noninterest bearing
$
381,247

 
$
378,600

Demand deposits -- interest bearing
222,356

 
209,430

Money market deposits
314,495

 
283,035

Savings deposits
126,774

 
120,720

Time deposits
371,232

 
378,855

Total deposits
1,416,104

 
1,370,640

 
 
 
 
Short-term borrowings:
 
 
 
Customer repurchase agreements
47,776

 
39,166

Other short-term borrowings

 
20,000

Long-term borrowings
9,985

 
9,980

Junior subordinated debt
27,749

 
27,724

Accrued interest payable and other liabilities
9,950

 
9,748

Total liabilities
1,511,564

 
1,477,258

 
 
 
 
Shareholders' equity
 

 
 

Preferred stock, $5 par, 2,000,000 shares authorized, none outstanding

 

Common stock, $1 par, 20,000,000 shares authorized, 8,638,744 shares outstanding at March 31, 2017 and 8,618,051 shares outstanding at December 31, 2016
8,591

 
8,578

Capital in excess of par value
75,445

 
75,076

Retained earnings
121,590

 
119,600

Accumulated other comprehensive loss, net
(1,385
)
 
(1,874
)
Total shareholders' equity
204,241

 
201,380

Total liabilities and shareholders' equity
$
1,715,805

 
$
1,678,638

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

3



American National Bankshares Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share data) (Unaudited)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Interest and Dividend Income:
 
 
 
Interest and fees on loans
$
12,704

 
$
12,115

Interest and dividends on securities:
 

 
 

Taxable
1,154

 
1,084

Tax-exempt
635

 
823

Dividends
79

 
91

Other interest income
109

 
58

Total interest and dividend income
14,681

 
14,171

Interest Expense:
 

 
 

Interest on deposits
1,200

 
1,297

Interest on short-term borrowings
28

 
1

Interest on long-term borrowings
80

 
81

Interest on junior subordinated debt
239

 
208

Total interest expense
1,547

 
1,587

Net Interest Income
13,134

 
12,584

Provision for Loan Losses
300

 
50

Net Interest Income After Provision for Loan Losses
12,834

 
12,534

Noninterest Income:
 

 
 

Trust fees
912

 
930

Service charges on deposit accounts
484

 
492

Other fees and commissions
712

 
672

Mortgage banking income
529

 
292

Securities gains, net
259

 
366

Brokerage fees
192

 
204

Income from Small Business Investment Companies
26

 
166

Other
157

 
175

Total noninterest income
3,271

 
3,297

Noninterest Expense:
 

 
 

Salaries
4,799

 
4,215

Employee benefits
1,183

 
1,114

Occupancy and equipment
1,068

 
1,099

FDIC assessment
129

 
188

Bank franchise tax
256

 
256

Core deposit intangible amortization
165

 
288

Data processing
487

 
444

Software
279

 
297

Other real estate owned, net
43

 
104

Other
2,032

 
1,913

Total noninterest expense
10,441

 
9,918

Income Before Income Taxes
5,664

 
5,913

Income Taxes
1,601

 
1,785

Net Income
$
4,063

 
$
4,128

 
 
 
 
Net Income Per Common Share:
 

 
 

Basic
$
0.47

 
$
0.48

Diluted
$
0.47

 
$
0.48

Average Common Shares Outstanding:
 

 
 

Basic
8,633,219

 
8,611,840

Diluted
8,651,139

 
8,617,008

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

4



American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net income
$
4,063

 
$
4,128

 
 
 
 
Other comprehensive income:
 

 
 

 
 
 
 
Unrealized gains on securities available for sale
1,011

 
2,222

Tax effect
(354
)
 
(778
)
 
 
 
 
Reclassification adjustment for gains on sales of securities
(259
)
 
(366
)
Tax effect
91

 
128

 
 
 
 
Other comprehensive income
489

 
1,206

 
 
 
 
Comprehensive income
$
4,552

 
$
5,334

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

 
 


5




American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share data) (Unaudited)
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance, December 31, 2015
$
8,605

 
$
75,375

 
$
111,565

 
$
2,290

 
$
197,835

 
 
 
 
 
 
 
 
 
 
Net income

 

 
4,128

 

 
4,128

 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
1,206

 
1,206

 
 
 
 
 
 
 
 
 
 
Stock repurchased (38,887 shares)
(39
)
 
(925
)
 

 

 
(964
)
 
 
 
 
 
 
 
 
 
 
Stock options exercised (2,484 shares)
2

 
57

 

 

 
59

 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock (3,046 shares)
3

 
(3
)
 

 

 

 
 
 
 
 
 
 
 
 
 
Equity based compensation (27,054 shares)
4

 
240

 

 

 
244

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.24 per share

 

 
(2,065
)
 

 
(2,065
)
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
$
8,575

 
$
74,744

 
$
113,628

 
$
3,496

 
$
200,443

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
8,578

 
$
75,076

 
$
119,600

 
$
(1,874
)
 
$
201,380

 
 
 
 
 
 
 
 
 
 
Net income

 

 
4,063

 

 
4,063

 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 
489

 
489

 
 
 
 
 
 
 
 
 
 
Stock options exercised (3,300 shares)
3

 
70

 

 

 
73

 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock (6,468 shares)
7

 
(7
)
 

 

 

 
 
 
 
 
 
 
 
 
 
Equity based compensation (17,393 shares)
3

 
306

 

 

 
309

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.24 per share

 

 
(2,073
)
 

 
(2,073
)
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
$
8,591

 
$
75,445

 
$
121,590

 
$
(1,385
)
 
$
204,241

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

6


American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net income
$
4,063

 
$
4,128

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

 
 

Provision for loan losses
300

 
50

Depreciation
444

 
475

Net accretion of acquisition accounting adjustments
(434
)
 
(1,001
)
Core deposit intangible amortization
165

 
288

Net amortization of securities
542

 
686

Net gains on sale or call of securities
(259
)
 
(366
)
Gain on sale of loans held for sale
(420
)
 
(233
)
Proceeds from sales of loans held for sale
22,668

 
14,131

Originations of loans held for sale
(18,124
)
 
(11,417
)
Net loss on other real estate owned
3

 
50

Valuation allowance on other real estate owned
26

 
53

Net gain on sale of premises and equipment

 
(1
)
Equity based compensation expense
309

 
244

Earnings on bank owned life insurance
(107
)
 
(115
)
Deferred income tax expense (benefit)
438

 
(1,716
)
Net change in interest receivable
601

 
(592
)
Net change in other assets
(350
)
 
883

Net change in interest payable
(49
)
 
8

Net change in other liabilities
250

 
964

Net cash provided by operating activities
10,066

 
6,519

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Proceeds from sales of securities available for sale
41,519

 
12,867

Proceeds from maturities, calls and paydowns of securities available for sale
12,885

 
26,127

Purchases of securities available for sale

 
(54,107
)
Net change in restricted stock
732

 
(43
)
Net increase in loans
(55,067
)
 
(28,080
)
Proceeds from sale of premises and equipment

 
1

Purchases of premises and equipment
(663
)
 
(149
)
Proceeds from sales of other real estate owned
37

 
685

Net cash used in investing activities
(557
)
 
(42,699
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net change in demand, money market, and savings deposits
53,087

 
26,048

Net change in time deposits
(7,623
)
 
3,723

Net change in customer repurchase agreements
8,610

 
1,573

Net change in other short-term borrowings
(20,000
)
 

Common stock dividends paid
(2,073
)
 
(2,065
)
Repurchase of common stock

 
(964
)
Proceeds from exercise of stock options
73

 
59

Net cash provided by financing activities
32,074

 
28,374

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
41,583

 
(7,806
)
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
53,207

 
95,337

 
 
 
 
Cash and Cash Equivalents at End of Period
$
94,790

 
$
87,531

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

7



AMERICAN NATIONAL BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Accounting Policies
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank").  The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, unfunded pension liability, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, the valuation of deferred tax assets and liabilities, and the valuation of other real estate owned ("OREO").
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 8.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period.  Certain reclassifications have been made to prior period balances to conform to the current period presentation. These reclassifications did not have an impact on net income and were considered immaterial. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things: (1) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (4) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and

8



reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission ("SEC") filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
    During August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Public business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
During March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

9



During March 2017, the FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.
Note 2 – Securities 
The amortized cost and fair value of investments in debt and equity securities at March 31, 2017 and December 31, 2016 were as follows (dollars in thousands):
 
March 31, 2017
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
91,940

 
$
39

 
$
2,208

 
$
89,771

Mortgage-backed and CMOs
75,769

 
473

 
850

 
75,392

State and municipal
113,906

 
2,560

 
478

 
115,988

Corporate
9,143

 
239

 
9

 
9,373

Equity securities
1,288

 
755

 

 
2,043

Total securities available for sale
$
292,046

 
$
4,066

 
$
3,545

 
$
292,567

 
December 31, 2016
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
106,379

 
$
62

 
$
2,387

 
$
104,054

Mortgage-backed and CMOs
79,917

 
514

 
938

 
79,493

State and municipal
145,757

 
2,540

 
782

 
147,515

Corporate
13,392

 
123

 
23

 
13,492

Equity securities
1,288

 
660

 

 
1,948

Total securities available for sale
$
346,733

 
$
3,899

 
$
4,130

 
$
346,502

Restricted Stock
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost.  The restricted securities are not subject to the investment security classification and are included as a separate line item on the Company's Consolidated Balance Sheet.  The FRB requires the Bank to maintain stock with a par value equal to 3.0% of its outstanding capital and an additional 3.0% is on call.  The FHLB requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at March 31, 2017 and December 31, 2016 was as follows (dollars in thousands):
 
March 31,
2017
 
December 31,
2016
FRB stock
$
3,564

 
$
3,559

FHLB stock
1,928

 
2,665

Total restricted stock
$
5,492

 
$
6,224


10



Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2017.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
81,734

 
$
2,208

 
$
81,734

 
$
2,208

 
$

 
$

Mortgage-backed and CMOs
53,331

 
850

 
51,745

 
822

 
1,586

 
28

State and municipal
21,665

 
478

 
21,665

 
478

 

 

Corporate
1,558

 
9

 
1,558

 
9

 

 

Total
$
158,288

 
$
3,545

 
$
156,702

 
$
3,517

 
$
1,586

 
$
28

Federal agencies and GSEs: The unrealized losses on the Company's investment in 21 government sponsored entities ("GSE") securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.
Mortgage-backed securities: The unrealized losses on the Company's investment in 35 GSE mortgage-backed securities were caused by interest rate increases. Three of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.
Collateralized Mortgage Obligations: The unrealized loss associated with one private GSE collateralized mortgage obligation ("CMO") is due to normal market fluctuations. This security has been in an unrealized loss position for 12 months or more. The contractual cash flows of this investment are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost basis of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2017.
State and municipal securities:  The unrealized losses on 29 state and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.
Corporate securities:  The unrealized losses on two corporate securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.
Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at March 31, 2017, and no impairment has been recognized.

11



The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2016 (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
89,597

 
$
2,387

 
$
89,597

 
$
2,387

 
$

 
$

Mortgage-backed and CMOs
57,762

 
938

 
56,076

 
911

 
1,686

 
27

State and municipal
47,221

 
782

 
47,221

 
782

 

 

Corporate
2,895

 
23

 
2,895

 
23

 

 

Total
$
197,475

 
$
4,130

 
$
195,789

 
$
4,103

 
$
1,686

 
$
27

Other-Than-Temporary-Impaired Securities 
As of March 31, 2017 and December 31, 2016, there were no securities classified as other-than-temporary impaired.
Note 3 – Loans
Loans, excluding loans held for sale, at March 31, 2017 and December 31, 2016, were comprised of the following (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Commercial
$
219,455

 
$
208,717

Commercial real estate:
 

 
 

Construction and land development
130,691

 
114,258

Commercial real estate
538,069

 
510,960

Residential real estate:
 

 
 

Residential
216,035

 
215,104

Home equity
110,844

 
110,751

Consumer
4,864

 
5,031

Total loans
$
1,219,958

 
$
1,164,821

Acquired Loans 
The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at March 31, 2017 and December 31, 2016 are as follows (dollars in thousands): 
 
March 31,
2017
 
December 31, 2016
Outstanding principal balance
$
98,341

 
$
104,172

Carrying amount
91,078

 
96,487

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies FASB Accounting Standards Codification ("ASC") 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Outstanding principal balance
$
33,443

 
$
34,378

Carrying amount
27,961

 
28,669


12



The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31, 2017
 
December 31, 2016
Balance at January 1
$
6,103

 
$
7,299

Accretion
(685
)
 
(3,232
)
Reclassification from nonaccretable difference
154

 
2,197

Other changes, net
183

 
(161
)
 
$
5,755

 
$
6,103

Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at March 31, 2017 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
27

 
$
139

 


 
$
47

 
$
213

 
$
219,242

 
$
219,455

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development

 
177

 
61

 
68

 
306

 
130,385

 
130,691

Commercial real estate
95

 

 
276

 
769

 
1,140

 
536,929

 
538,069

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
330

 
159

 
724

 
1,327

 
2,540

 
213,495

 
216,035

Home equity
161

 

 

 
207

 
368

 
110,476

 
110,844

Consumer
2

 
3

 

 
10

 
15

 
4,849

 
4,864

Total
$
615

 
$
478

 
$
1,061

 
$
2,428

 
$
4,582

 
$
1,215,376

 
$
1,219,958

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2016 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
50

 
$

 
$

 
$
19

 
$
69

 
$
208,648

 
$
208,717

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
60

 
12

 

 
64

 
136

 
114,122

 
114,258

Commercial real estate

 
127

 
339

 
773

 
1,239

 
509,721

 
510,960

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
1,280

 
117

 
248

 
1,802

 
3,447

 
211,657

 
215,104

Home equity
229

 

 

 
289

 
518

 
110,233

 
110,751

Consumer
6

 
5

 

 
18

 
29

 
5,002

 
5,031

Total
$
1,625

 
$
261

 
$
587

 
$
2,965

 
$
5,438

 
$
1,159,383

 
$
1,164,821


13



Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at March 31, 2017 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
41

 
$
40

 
$

 
$
17

 
$
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
152

 
152

 

 
183

 
2

Commercial real estate
1,027

 
1,025

 

 
1,345

 
16

Residential:
 

 
 

 
 

 
 

 
 

Residential
491

 
504

 

 
361

 
9

Home equity
6

 
6

 

 
128

 

Consumer
8

 
8

 

 
10

 

 
$
1,725

 
$
1,735

 
$

 
$
2,044

 
$
28

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial *
77

 
77

 

 
78

 
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development*
68

 
68

 

 
238

 

Commercial real estate*
43

 
43

 

 
245

 

Residential
 

 
 

 
 

 
 

 
 

Residential
1,396

 
1,396

 
20

 
1,564

 
8

Home equity
333

 
332

 
2

 
340

 
1

Consumer*
10

 
10

 

 
14

 

 
$
1,927

 
$
1,926

 
$
22

 
$
2,479

 
$
10

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
118

 
$
117

 
$

 
$
95

 
$
2

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
220

 
220

 

 
421

 
2

Commercial real estate
1,070

 
1,068

 

 
1,590

 
16

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,887

 
1,900

 
20

 
1,925

 
17

Home equity
339

 
338

 
2

 
468

 
1

Consumer
18

 
18

 

 
24

 

 
$
3,652

 
$
3,661

 
$
22

 
$
4,523

 
$
38

*Allowance is reported as zero in the table due to presentation in thousands and rounding.

14



The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2016 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
24

 
$
24

 
$

 
$
12

 
$
2

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
158

 
157

 

 
198

 
16

Commercial real estate
1,916

 
1,917

 

 
1,409

 
107

Residential:
 

 
 

 
 

 
 

 
 

Residential
557

 
567

 

 
318

 
38

Home equity
6

 
6

 

 
153

 
16

Consumer
9

 
9

 

 
10

 
1

 
$
2,670

 
$
2,680

 
$

 
$
2,100

 
$
180

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial*
$
19

 
$
19

 
$

 
$
78

 
$
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development*
64

 
65

 

 
272

 
10

Commercial real estate*
48

 
48

 

 
286

 
7

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,639

 
1,639

 
22

 
1,593

 
32

Home equity
386

 
385

 
1

 
345

 
4

Consumer*
18

 
18

 

 
14

 

 
$
2,174

 
$
2,174

 
$
23

 
$
2,588

 
$
54

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
43

 
$
43

 
$

 
$
90

 
$
3

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
222

 
222

 

 
470

 
26

Commercial real estate
1,964

 
1,965

 

 
1,695

 
114

Residential:
 

 
 

 
 

 
 

 
 

Residential
2,196

 
2,206

 
22

 
1,911

 
70

Home equity
392

 
391

 
1

 
498

 
20

Consumer
27

 
27

 

 
24

 
1

 
$
4,844

 
$
4,854

 
$
23

 
$
4,688

 
$
234

*Allowance is reported as zero in the table due to presentation in thousands and rounding.


15



The following tables show the detail of loans modified as troubled debt restructurings ("TDRs") during the three months ended March 31, 2017 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended March 31, 2017
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
2

 
$
68

 
$
68

Commercial real estate
 

 

 

Construction and land development
 

 

 

Home Equity
 
1

 
21

 
21

Residential real estate
 

 

 

Consumer
 

 

 

Total
 
3

 
$
89

 
$
89

 
 
The following tables show the detail of loans modified as TDRs during the three months ended March 31, 2016 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended March 31, 2016
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 

 
$

 
$

Commercial real estate
 
1

 
68

 
66

Construction and land development
 

 

 

Home Equity
 

 

 

Residential real estate
 

 

 

Consumer
 

 

 

Total
 
1

 
$
68

 
$
66

 
 
During the three months ended March 31, 2017 and 2016, the Company had no loans that subsequently defaulted within twelve months of modification. The Company defines defaults as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification.
Residential Real Estate in Process of Foreclosure
The Company had $1,068,000 in residential real estate loans in the process of foreclosure at March 31, 2017 and $875,000 and $653,000 in residential OREO at March 31, 2017 and December 31, 2016, respectively.

16



Risk Grades
The following table shows the Company's loan portfolio broken down by internal risk grading as of March 31, 2017 (dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
 
Commercial
 
Construction and Land Development
 
Commercial
Real Estate
Other
 
Residential
 
Home
Equity
Pass
$
218,801

 
$
129,480

 
$
529,324

 
$
201,774

 
$
108,943

Special Mention
462

 
409

 
3,928

 
8,842

 
1,296

Substandard
192

 
802

 
4,817

 
5,419

 
605

Doubtful

 

 

 

 

Total
$
219,455

 
$
130,691

 
$
538,069

 
$
216,035

 
$
110,844

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
Consumer
 
 
Performing
$
4,849

Nonperforming
15

Total
$
4,864

 
The following table shows the Company's loan portfolio broken down by internal risk grading as of December 31, 2016 (dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
 
Commercial
 
Construction and Land Development
 
Commercial
Real Estate
Other
 
Residential
 
Home
Equity
Pass
$
208,098

 
$
112,729

 
$
501,081

 
$
199,278

 
$
108,799

Special Mention
592

 
902

 
4,859

 
10,600

 
1,257

Substandard
27

 
627

 
5,020

 
5,226

 
695

Doubtful

 

 

 

 

Total
$
208,717

 
$
114,258

 
$
510,960

 
$
215,104

 
$
110,751

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
Consumer
 
 
Performing
$
5,003

Nonperforming
28

Total
$
5,031

 
Loans classified in the Pass category typically are fundamentally sound and risk factors are reasonable and acceptable.
Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.

17



Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.
Consumer loans are classified as performing or nonperforming.  A loan is nonperforming when payments of interest and principal are past due 90 days or more, or payments are less than 90 days past due, but there are other good reasons to doubt that payment will be made in full.
Note 4 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Changes in the allowance for loan losses and the reserve for unfunded lending commitments as of the indicated dates and periods are presented below (dollars in thousands):
 
Three Months Ended 
 March 31, 2017
 
Year Ended December 31,
2016
 
Three Months Ended 
 March 31, 2016
Allowance for Loan Losses
 
 
 
 
 
Balance, beginning of period
$
12,801

 
$
12,601

 
$
12,601

Provision for loan losses
300

 
250

 
50

Charge-offs
(49
)
 
(326
)
 
(40
)
Recoveries
56

 
276

 
64

Balance, end of period
$
13,108

 
$
12,801

 
$
12,675

 
 
 
 
 
 
Reserve for Unfunded Lending Commitments
 

 
 

 
 

Balance, beginning of period
$
203

 
$
184

 
$
184

Provision for unfunded commitments
3

 
19

 
4

Charge-offs