10-Q 1 v417425_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For quarterly period ended June 30, 2015

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______________ to ________________

 

Commission file number 0-14237

 

First United Corporation

(Exact name of registrant as specified in its charter)

 

Maryland   52-1380770
(State or other jurisdiction of   (I. R. S. Employer Identification No.)
incorporation or organization)    

 

19 South Second Street, Oakland, Maryland 21550-0009
(Address of principal executive offices) (Zip Code)

 

(800) 470-4356

(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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R 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). Yes R 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 ¨ (Do not check if a smaller reporting company) Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No R

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,254,620 shares of common stock, par value $.01 per share, as of July 31, 2015.

 

 

 

  

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

 

PART I.  FINANCIAL INFORMATION   3
       
Item 1. Financial Statements (unaudited)   3
       
  Consolidated Statement of Financial Condition – June 30, 2015 and December 31, 2014   3
       
  Consolidated Statement of Operations - for the three and six months ended June 30, 2015 and 2014   4 - 5
       
  Consolidated Statement of Comprehensive Income – for the three and six months ended June 30, 2015 and 2014   6
       
  Consolidated Statement of Changes in Shareholders’ Equity - for the six months ended June 30, 2015 and year ended December 31, 2014   7
       
  Consolidated Statement of Cash Flows - for the six months ended June 30, 2015 and 2014   8
       
  Notes to Consolidated Financial Statements   9
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   53
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   75
       
Item 4.   Controls and Procedures   75
       
PART II. OTHER INFORMATION   76
       
Item 1. Legal Proceedings   76
       
Item 1A. Risk Factors   76
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   76
       
Item 3. Defaults upon Senior Securities   76
       
Item 4. Mine Safety Disclosures   76
       
Item 5. Other Information   76
       
Item 6. Exhibits   76
       
SIGNATURES   76
     
EXHIBIT INDEX   77

 

 2 
 

  

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share and percentage data)

 

   June 30,   December 31, 
   2015   2014 
   (Unaudited) 
Assets          
Cash and due from banks  $54,913   $27,554 
Interest bearing deposits in banks   2,991    7,897 
Cash and cash equivalents   57,904    35,451 
Investment securities – available-for-sale (at fair value)   205,226    221,117 
Investment securities – held to maturity (fair value $108,417 at June 30, 2015 and $110,771 at December 31, 2014)   107,816    109,449 
Restricted investment in bank stock, at cost   7,180    7,524 
Loans   845,090    839,991 
Allowance for loan losses   (11,809)   (12,065)
Net loans   833,281    827,926 
Premises and equipment, net   25,108    25,629 
Goodwill and other intangible assets, net   11,004    11,004 
Bank owned life insurance   39,559    33,504 
Deferred tax assets   24,006    25,907 
Other real estate owned   11,587    12,932 
Accrued interest receivable and other assets   20,400    21,853 
Total Assets  $1,343,071   $1,332,296 
           
Liabilities and Shareholders’ Equity          
Liabilities:          
Non-interest bearing deposits  $211,023   $201,188 
Interest bearing deposits   792,072    780,135 
Total deposits   1,003,095    981,323 
           
Short-term borrowings   28,252    39,801 
Long-term borrowings   177,572    182,606 
Accrued interest payable and other liabilities   20,998    19,567 
Total Liabilities   1,229,917    1,223,297 
           
Shareholders’ Equity:          
Preferred stock – no par value; Authorized 2,000 shares of which 30 shares of Series A, $1,000 per share liquidation preference, 5% cumulative increasing to 9% cumulative on February 15, 2014, were issued and outstanding on June 30, 2015 and December 31, 2014   30,000    30,000 
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 6,255 shares at June 30, 2015 and 6,228 at December 31, 2014   63    62 
Surplus   21,892    21,795 
Retained earnings   78,568    77,375 
Accumulated other comprehensive loss   (17,369)   (20,233)
Total Shareholders’ Equity   113,154    108,999 
Total Liabilities and Shareholders’ Equity  $1,343,071   $1,332,296 

 

See accompanying notes to the consolidated financial statements

  

 3 
 

  

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

 

   Six Months Ended 
   June 30, 
   2015   2014 
   (Unaudited) 
Interest income          
Interest and fees on loans  $18,238   $18,697 
Interest on investment securities          
Taxable   3,610    3,744 
Exempt from federal income tax   668    804 
Total investment income   4,278    4,548 
Other   175    176 
Total interest income   22,691    23,421 
Interest expense          
Interest on deposits   2,058    2,335 
Interest on short-term borrowings   28    30 
Interest on long-term borrowings   2,936    3,197 
Total interest expense   5,022    5,562 
Net interest income   17,669    17,859 
Provision for loan losses   126    941 
Net interest income after provision for loan losses   17,543    16,918 
Other operating income          
Net gains – other   5    961 
Total net gains   5    961 
Service charges   1,385    1,466 
Trust department   2,770    2,568 
Debit card income   1,008    987 
Bank owned life insurance   555    488 
Brokerage commissions   468    406 
Other   218    221 
Total other income   6,404    6,136 
Total other operating income   6,409    7,097 
Other operating expenses          
Salaries and employee benefits   10,258    9,703 
FDIC premiums   930    882 
Equipment   1,271    1,306 
Occupancy   1,250    1,276 
Data processing   1,709    1,576 
Professional Services   905    853 
Other real estate owned   1,047    1,614 
Other   3,282    3,455 
Total other operating expenses   20,652    20,665 
Income before income tax expense   3,300    3,350 
Provision for income tax expense   757    752 
Net Income   2,543    2,598 
Accumulated preferred stock dividends and discount accretion   (1,350)   (1,250)
Net Income Available to Common Shareholders  $1,193   $1,348 
Basic and diluted net income per common share  $0.19   $0.22 
Weighted average number of basic and diluted shares outstanding   6,243    6,217 

 

See accompanying notes to the consolidated financial statements

 

 4 
 

  

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

 

   Three Months Ended 
   June 30, 
   2015   2014 
   (Unaudited) 
Interest income          
Interest and fees on loans  $9,109   $9,359 
Interest on investment securities          
Taxable   1,749    1,756 
Exempt from federal income tax   323    393 
Total investment income   2,072    2,149 
Other   87    159 
Total interest income   11,268    11,667 
Interest expense          
Interest on deposits   1,017    1,168 
Interest on short-term borrowings   14    16 
Interest on long-term borrowings   1,462    1,543 
Total interest expense   2,493    2,727 
Net interest income   8,775    8,940 
Provision for loan losses   52    577 
Net interest income after provision for loan losses   8,723    8,363 
Other operating income          
Net gains– other   102    1,024 
Total net gains   102    1,024 
Service charges   735    757 
Trust department   1,389    1,316 
Debit card income   510    530 
Bank owned life insurance   288    245 
Brokerage commissions   232    201 
Other   110    83 
Total other income   3,264    3,132 
Total other operating income   3,366    4,156 
Other operating expenses          
Salaries and employee benefits   5,276    5,018 
FDIC premiums   471    491 
Equipment   653    651 
Occupancy   614    621 
Data processing   872    794 
Professional Services   614    508 
Other real estate owned   415    1,157 
Other   1,701    1,701 
Total other operating expenses   10,616    10,941 
Income before income tax expense   1,473    1,578 
Provision for income tax expense   298    338 
Net Income   1,175    1,240 
Accumulated preferred stock dividends and discount accretion   (675)   (803)
Net Income Available to Common Shareholders  $500   $437 
Basic and diluted net income per common share  $0.08   $0.07 
Weighted average number of basic and diluted shares outstanding   6,249    6,222 

 

See accompanying notes to the consolidated financial statements

 

 5 
 

 

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

 

   Six months ended 
   June 30, 
   2015   2014 
Comprehensive Income (in thousands)  (Unaudited) 
Net Income  $2,543   $2,598 
           
Other comprehensive income/(loss), net of tax and reclassification adjustments:          
Net unrealized gains on investments with OTTI   2,816    3,042 
           
Net unrealized gains on all other AFS securities   667    8,342 
           
Net unrealized gains/(losses) on HTM securities   161    (2,372)
           
Net unrealized gains on cash flow hedges   35    111 
           
Net unrealized (losses)/gains on pension   (836)   37 
           
Net unrealized gains on SERP   21    1 
           
Other comprehensive income, net of tax   2,864    9,161 
           
Comprehensive income  $5,407   $11,759 

 

See accompanying notes to the consolidated financial statements

 

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

 

   Three months ended 
   June 30, 
   2015   2014 
Comprehensive Income (in thousands)  (Unaudited) 
Net Income  $1,175   $1,240 
           
Other comprehensive income/(loss), net of tax and reclassification adjustments:          
Net unrealized gains on investments with OTTI   1,246    408 
           
Net unrealized (losses)/gains on all other AFS securities   (12)   5,306 
           
Net unrealized gains/(losses) on HTM securities   91    (2,372)
           
Net unrealized gains on cash flow hedges   14    56 
           
Net unrealized (losses)/gains on pension   (746)   164 
           
Net unrealized gains on SERP   11    0 
           
Other comprehensive income, net of tax   604    3,562 
           
Comprehensive income  $1,779   $4,802 

 

See accompanying notes to the consolidated financial statements

 

 6 
 

  

FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands)

 

   Preferred
Stock
   Common
Stock
   Surplus   Retained
Earnings
   Accumulated
Other
Comprehensive
Income/(Loss)
   Total
Shareholders'
Equity
 
   (Unaudited) 
Balance at January 1, 2014  $29,994   $62   $21,661   $74,379   $(24,213)  $101,883 
                               
Net income                  5,597         5,597 
Other comprehensive income                       3,980    3,980 
Stock based compensation             134              134 
Preferred stock discount accretion   6              (6)        0 
Preferred stock dividends paid                  (2,595)        (2,595)
                               
Balance at December 31, 2014   30,000    62    21,795    77,375    (20,233)   108,999 
                               
Net income                  2,543         2,543 
Other comprehensive income                       2,864    2,864 
Stock based compensation        1    97              98 
Preferred stock dividends paid                  (1,350)        (1,350)
                               
Balance at June 30, 2015  $30,000   $63   $21,892   $78,568   $(17,369)  $113,154 

 

See accompanying notes to the consolidated financial statements

 

 7 
 

  

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)

 

   Six months ended 
   June 30, 
   2015   2014 
   (Unaudited) 
Operating activities          
Net income  $2,543   $2,598 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses   126    941 
Depreciation   872    994 
Stock compensation   97    56 
(Gain)/loss on sales of other real estate owned   (78)   970 
Write-downs of other real estate owned   852    443 
Gain on loan sales   (24)   (18)
Loss on disposal of fixed assets   2    3 
Net amortization of investment securities discounts and premiums- AFS   296    64 
Loss on sales of investment securities – available-for-sale   17    154 
Gain on sales of investment securities – held for trading   0    (1,100)
Amortization of deferred loan fees   (232)   (218)
Decrease in accrued interest receivable and other assets   1,453    1,985 
Decrease in deferred tax benefit   268    2 
Increase/(decrease) in accrued interest payable and other liabilities   135    (5,354)
Earnings on bank owned life insurance   (555)   (488)
Net cash provided by operating activities   5,772    1,032 
           
Investing activities          
Proceeds from maturities/calls of investment securities available-for-sale   34,501    100,719 
Proceeds from maturities/calls of investment securities held-to-maturity   3,949    1,509 
Proceeds from sales of investment securities available-for-sale   24,667    56,222 
Proceeds from sales of investment securities held for trading   0    1,100 
Purchases of investment securities available-for-sale   (37,797)   (114,752)
Purchases of investment securities held-to-maturity   (2,316)   (1,256)
Proceeds from sales of other real estate owned   1,336    4,745 
Proceeds from loan sales   2,769    2,104 
Proceeds from disposal of fixed assets   6    0 
Purchase of BOLI policy   (5,500)   0 
Net decrease in FHLB stock   344    433 
Net increase in loans   (8,759)   (20,253)
Purchases of premises and equipment   (359)   (404)
Net cash provided by investing activities   12,841    30,167 
           
Financing activities          
Net increase in deposits   21,772    1,337 
Preferred stock dividends paid   (1,350)   (7,745)
Common Stock Grants   1    0 
Net decrease in short-term borrowings   (11,549)   (5,763)
Payments on long-term borrowings   (5,034)   (32)
Net cash provided by/(used in) financing activities   3,840    (12,203)
Increase in cash and cash equivalents   22,453    18,996 
Cash and cash equivalents at beginning of the year   35,451    43,063 
Cash and cash equivalents at end of period  $57,904   $62,059 
           
Supplemental information          
Interest paid  $5,056   $12,327 
Non-cash investing activities:          
Transfers from loans to other real estate owned  $765   $1,415 
Transfers from securities available for sale to held-to-maturity  $0   $103,934 

 

See accompanying notes to the consolidated financial statements

 

 8 
 

 

FIRST UNITED CORPORATION

NoteS to Consolidated Financial Statements (UNAUDITED)

 

Note 1 – Basis of Presentation

 

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. Operating results for the six- and three-month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2015 presentation. Such reclassifications had no impact on net income or equity.

 

First United Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2015 for items that should potentially be recognized or disclosed in these financial statements as prescribed by ASC Topic 855, Subsequent Events.

 

As used in these notes to consolidated financial statements, First United Corporation and its consolidated subsidiaries are sometimes collectively referred to as the “Corporation”.

 

Note 2 – Earnings Per Common Share

 

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. There is no dilutive effect on earnings per share during loss periods.

 

The following tables set forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2015 and 2014:

 

   Six months ended June 30, 
   2015   2014 
       Average   Per Share       Average   Per Share 
(in thousands, except for per share amount)  Income   Shares   Amount   Income   Shares   Amount 
Basic and Diluted Earnings Per Share:                        
Net income  $2,543             $2,598           
Preferred stock dividends   (1,350)             (1,244)          
Discount accretion on preferred stock   0              (6)          
Net income available to common shareholders  $1,193    6,243   $0.19   $1,348    6,217   $0.22 

 

 9 
 

  

   Three months ended June 30, 
   2015   2014 
       Average   Per Share       Average   Per Share 
(in thousands, except for per share amount)  Income   Shares   Amount   Income   Shares   Amount 
Basic and Diluted Earnings Per Share:                        
Net income  $1,175             $1,240           
Preferred stock dividends deferred   (675)             (803)          
Discount accretion on preferred stock   0              0           
Net income available to common shareholders  $500    6,249   $0.08   $437    6,222   $0.07 

 

Note 3 – Net Gains

 

The following table summarizes the gain/(loss) activity for the six- and three-month periods ended June 30, 2015 and 2014:

 

   Six months ended   Three months ended 
   June 30,   June 30, 
(in thousands)  2015   2014   2015   2014 
Net gains – other:                    
Available-for-sale securities:                    
Realized gains  $156   $205   $140   $110 
Realized losses   (173)   (359)   (60)   (196)
Held-for-trading:                    
Realized gains   0    1,100    0    1,100 
Gain on sale of consumer loans   24    18    22    10 
Loss on disposal of fixed assets   (2)   (3)   0    0 
Net gains – other  $5   $961   $102   $1,024 

 

Note 4 – Cash and Cash Equivalents

 

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve and other correspondent banks, is carried at cost which approximates fair value.

 

   June 30,   December 31, 
(in thousands)  2015   2014 
Cash and due from banks, weighted average interest rate of 0.09% (at June 30, 2015)  $54,913   $27,554 

 

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at cost which approximates fair value and, as of June 30, 2015 and December 31, 2014, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta, First Tennessee Bank (“FTN”), and Merchants and Traders (“M&T”).

 

   June 30,   December 31, 
(in thousands)  2015   2014 
FHLB daily investments, interest rate of 0.005% (at June 30, 2015)  $1,130   $983 
FTN daily investments, interest rate of 0.08% (at June 30, 2015)   850    850 
M&T daily investments, interest rate of 0.15% (at June 30, 2015)   1,011    6,064 
   $2,991   $7,897 

 

 10 
 

  

Note 5 – Investments

 

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

 

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.

 

The following table shows a comparison of amortized cost and fair values of investment securities at June 30, 2015 and December 31, 2014:

 

(in thousands)  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value   OTTI in AOCI 
June 30, 2015                         
Available for Sale:                         
U.S. treasuries  $10,059   $16   $0   $10,075   $0 
U.S. government agencies   44,056    182    143    44,095    0 
Residential mortgage-backed agencies   20,073    158    268    19,963    0 
Commercial mortgage-backed agencies   42,795    171    100    42,866    0 
Collateralized mortgage obligations   13,170    100    91    13,179    0 
Obligations of states and political subdivisions   44,343    1,103    444    45,002    0 
Collateralized debt obligations   35,563    3,298    8,815    30,046    1,460 
Total available for sale  $210,059   $5,028   $9,861   $205,226   $1,460 
                          
Held to Maturity:                         
U.S. government agencies  $24,611   $306   $33   $24,884   $0 
Residential mortgage-backed agencies   55,616    195    121    55,690    0 
Commercial mortgage-backed agencies   18,215    287    0    18,502    0 
Collateralized mortgage obligations   6,749    0    140    6,609    0 
Obligations of states and political subdivisions   2,625    107    0    2,732    0 
Total held to maturity  $107,816   $895   $294   $108,417   $0 
                          
December 31, 2014                         
Available for Sale:                         
U.S. treasuries  $29,607   $0   $11   $29,596   $0 
U.S. government agencies   39,077    117    253    38,941    0 
Residential mortgage-backed agencies   45,175    510    412    45,273    0 
Commercial mortgage-backed agencies   26,007    53    103    25,957    0 
Collateralized mortgage obligations   8,611    96    0    8,707    0 
Obligations of states and political subdivisions   46,151    1,413    260    47,304    0 
Collateralized debt obligations   37,117    1,155    12,933    25,339    6,143 
Total available for sale  $231,745   $3,344   $13,972   $221,117   $6,143 
Held to Maturity:                         
U.S. government agencies  $24,520   $514   $0   $25,034   $0 
Residential mortgage-backed agencies   58,400    613    5    59,008    0 
Commercial mortgage-backed agencies   16,425    312    0    16,737    0 
Collateralized mortgage obligations   7,379    5    0    7,384    0 
Obligations of states and political subdivisions   2,725    0    117    2,608    0 
Total held to maturity  $109,449   $1,444   $122   $110,771   $0 

 

 11 
 

  

Proceeds from sales of available for sale securities and the realized gains and losses are as follows:

 

   Six months ended   Three months ended 
   June 30,   June 30, 
(in thousands)  2015   2014   2015   2014 
Proceeds  $24,667   $56,222   $9,578   $47,637 
Realized gains   156    1,305    140    1,210 
Realized losses   173    359    60    196 

 

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at June 30, 2015 and December 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

 

   Less than 12 months   12 months or more 
(in thousands)  Fair Value   Unrealized
Losses
   Fair Value   Unrealized Losses 
June 30, 2015                    
Available for Sale:                    
U.S. treasuries  $0   $0   $0   $0 
U.S. government agencies   13,963    102    9,959    41 
Residential mortgage-backed agencies   0    0    8,437    268 
Commercial mortgage-backed agencies   23,311    100    0    0 
Collateralized mortgage obligations   5,701    91    0    0 
Obligations of states and political subdivisions   14,531    290    4,860    154 
Collateralized debt obligations   0    0    22,641    8,815 
Total available for sale  $57,506   $583   $45,897   $9,278 
                     
Held to Maturity:                    
U.S. government agencies  $6,985   $33   $0   $0 
Residential mortgage-backed agencies   23,233    121    0    0 
Collateralized mortgage obligations   6,609    140    0    0 
Total held to maturity  $36,827   $294   $0   $0 
                     
December 31, 2014                    
Available for Sale:                    
U.S. treasuries  $27,096   $11   $0   $0 
U.S. government agencies   0   $0   $18,819   $253 
Residential mortgage-backed agencies   0    0    17,918    412 
Commercial mortgage-backed agencies   12,298    97    973    6 
Obligations of states and political subdivisions   0    0    8,981    260 
Collateralized debt obligations   0    0    20,290    12,933 
Total available for sale  $39,394   $108   $66,981   $13,864 
Held to Maturity:                    
U.S. government agencies  $0   $0   $0   $0 
Residential mortgage-backed agencies   3,850    5    0    0 
Obligations of states and political subdivisions   0    0    2,608    117 
Total held to maturity  $3,850   $5   $2,608   $117 

 

 12 
 

  

Management systematically evaluates securities for impairment on a quarterly basis. Management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other-than-temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

 

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. Based on management’s review of the assumptions and results of the third-party review, it does not believe that there were any material differences in the valuations between December 31, 2014 and June 30, 2015.

 

U.S. Treasuries – Available for Sale – As of June 30, 2015, there were no securities issued by the U.S. Treasury that were in a loss position.

 

U.S. Government Agencies – Available for Sale – There were three U.S. government agencies in an unrealized loss position for less than 12 months as of June 30, 2015. There was one U.S. government agency in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015.

 

Residential Mortgage-Backed Agencies – Available for Sale - There were no residential mortgage-backed agencies in an unrealized loss position for less than 12 months as of June 30, 2015. There was one residential mortgage-backed agency security in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015.

 

Commercial Mortgage-Backed Agencies – Available for Sale – There were five commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of June 30, 2015. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no commercial mortgage-backed agency securities in an unrealized loss position for 12 months or more.

 

Collateralized Mortgage Obligations – Available for Sale – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2015. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

 

 13 
 

  

Obligations of State and Political Subdivisions – Available for Sale – There were ten obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months at June 30, 2015. There was one security that had been in an unrealized loss position for 12 months or more. These investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers and performs an in-depth credit analysis on the securities. Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms. The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

Collateralized Debt Obligations – Available for Sale - The $8.8 million in unrealized losses greater than 12 months at June 30, 2015 relates to 13 pooled trust preferred securities that are included in the CDO portfolio. See Note 9 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first six months of 2015. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

 

U.S. Government Agencies – Held to Maturity – There was one security issued by government agencies in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015. There were no securities issued by government agencies in an unrealized loss position for 12 months or more.

 

Residential Mortgage-Backed Agencies – Held to Maturity - Twelve residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015. There were no residential mortgage-backed agencies in an unrealized loss position for 12 months or more.

 

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of June 30, 2015 in a loss position.

 

Collateralized Mortgage Obligations – Held to Maturity – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2015. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at June 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

 

Obligations of State and Political Subdivisions – Held to Maturity – There were no obligations of state and political subdivisions in the Held to Maturity portfolio as of June 30, 2015 in a loss position.

 

 14 
 

  

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the six- and three-month periods ended June 30, 2015 and 2014:

 

   Six months ended June 30, 
(in thousands)  2015   2014 
Balance of credit-related OTTI at January 1  $12,583   $13,422 
Reduction for increases in cash flows expected to be collected   (340)   (331)
Balance of credit-related OTTI at June 30  $12,243   $13,091 

 

   Three months ended June 30, 
(in thousands)  2015   2014 
Balance of credit-related OTTI at April 1  $12,416   $13,262 
Reduction for increases in cash flows expected to be collected   (173)   (171)
Balance of credit-related OTTI at June 30  $12,243   $13,091 

 

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2015 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   June 30, 2015 
(in thousands)  Amortized Cost   Fair Value 
Contractual Maturity          
Available for sale:          
Due in one year or less  $0   $0 
Due after one year through five years   53,470    53,689 
Due after five years through ten years   20,615    21,236 
Due after ten years   59,936    54,293 
    134,021    129,218 
           
Residential mortgage-backed agencies   20,073    19,963 
Commercial mortgage-backed agencies   42,795    42,866 
Collateralized mortgage obligations   13,170    13,179 
   $210,059   $205,226 
Held to Maturity:          
Due after five years through ten years  $15,538   $15,799 
Due after ten years   11,698    11,817 
    27,236    27,616 
           
Residential mortgage-backed agencies   55,616    55,690 
Commercial mortgage-backed agencies   18,215    18,502 
Collateralized mortgage obligations   6,749    6,609 
   $107,816   $108,417 

 

Note 6 - Restricted Investment in Bank Stock

 

Restricted stock, which represents required investments in the common stock of the FHLB of Atlanta, Atlantic Community Bankers Bank (“ACBB”) and Community Bankers Bank (“CBB”), is carried at cost and is considered a long-term investment.

 

 15 
 

  

Management evaluates the restricted stock for impairment in accordance with ASC Industry Topic 942, Financial Services – Depository and Lending, (ASC Section 942-325-35). Management’s evaluation of potential impairment is based on management’s assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (a) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (b) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (c) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank. Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of June 30, 2015.

 

The Corporation recognizes dividends received on its restricted stock investments on a cash basis. For the six months ended June 30, 2015, dividends of $155,668 were recognized in earnings. For the comparable period of 2014, dividends of $144,336 were recognized in earnings. For the three months ended June 30, 2015 and 2014, dividends of $76,511 and $71,338, respectively, were recognized in earnings.

 

Note 7 – Loans and Related Allowance for Loan Losses

 

The following table summarizes the primary segments of the loan portfolio as of June 30, 2015 and December 31, 2014:

 

(in thousands)  Commercial
Real Estate
   Acquisition and
Development
   Commercial
and
Industrial
   Residential 
Mortgage
   Consumer   Total 
June 30, 2015                              
                               
Individually evaluated for impairment  $12,598   $5,892   $1,474   $4,620   $0   $24,584 
Collectively evaluated for impairment  $248,577   $88,981   $92,057   $366,335   $24,556   $820,506 
Total loans  $261,175   $94,873   $93,531   $370,955   $24,556   $845,090 
                               
December 31, 2014                              
                               
Individually evaluated for impairment  $11,949   $6,553   $1,861   $4,418   $0   $24,781 
Collectively evaluated for impairment  $244,115   $92,748   $91,394   $363,223   $23,730   $815,210 
Total loans  $256,064   $99,301   $93,255   $367,641   $23,730   $839,991 

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, non-farm, and nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. A&D loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan is made. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes. Amortizing term loans are primarily first lien loans. Home equity lines of credit are generally second lien loans. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

  

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short-term will be classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

 

 16 
 

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Department performs an annual review of all commercial relationships of $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Department continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or criticized non-consumer loans greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system as of June 30, 2015 and December 31, 2014:

 

(in thousands)  Pass   Special Mention   Substandard   Total 
June 30, 2015                    
Commercial real estate                    
Non owner-occupied  $118,276   $11,754   $11,002   $141,032 
All other CRE   92,069    9,397    18,677    120,143 
Acquisition and development                    
1-4 family residential construction   15,232    0    700    15,932 
All other A&D   72,030    78    6,833    78,941 
Commercial and industrial   89,473    688    3,370    93,531 
Residential mortgage                    
Residential mortgage - term   285,546    246    10,378    296,170 
Residential mortgage - home equity   73,438    49    1,298    74,785 
Consumer   24,519    0    37    24,556 
Total  $770,583   $22,212   $52,295   $845,090 
                     
December 31, 2014                    
Commercial real estate                    
Non owner-occupied  $115,276   $10,884   $11,273   $137,433 
All other CRE   90,740    8,618    19,273    118,631 
Acquisition and development                    
1-4 family residential construction   12,920    0    790    13,710 
All other A&D   72,323    1,356    11,912    85,591 
Commercial and industrial   88,579    884    3,792    93,255 
Residential mortgage                    
Residential mortgage - term   280,113    379    10,934    291,426 
Residential mortgage - home equity   74,698    90    1,427    76,215 
Consumer   23,658    0    72    23,730 
Total  $758,307   $22,211   $59,473   $839,991 

 

 17 
 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment remains unpaid 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

 

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of June 30, 2015 and December 31, 2014:

 

(in thousands)  Current   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days+
Past Due
   Total Past
Due and
Accruing
   Non-Accrual   Total Loans 
June 30, 2015                                   
Commercial real estate                                   
Non owner-occupied  $136,368   $199   $2,820   $0   $3,019   $1,645   $141,032 
All other CRE   115,151    47    0    0    47    4,945    120,143 
Acquisition and development                                   
1-4 family residential construction   15,932    0    0    0    0    0    15,932 
All other A&D   75,799    0    110    20    130    3,012    78,941 
Commercial and industrial   93,242    120    0    0    120    169    93,531 
Residential mortgage                                   
Residential mortgage - term   291,279    512    2,240    392    3,144    1,747    296,170 
Residential mortgage - home equity   73,855    441    125    0    566    364    74,785 
Consumer   24,291    208    54    3    265    0    24,556 
Total  $825,917   $1,527   $5,349   $415   $7,291   $11,882   $845,090 
                                    
December 31, 2014                                   
Commercial real estate                                   
Non owner-occupied  $135,994   $104   $183   $0   $287   $1,152   $137,433 
All other CRE   112,825    1,196    0    0    1,196    4,610    118,631 
Acquisition and development                                   
1-4 family residential construction   13,710    0    0    0    0    0    13,710 
All other A&D   81,702    239    40    1    280    3,609    85,591 
Commercial and industrial   93,060    0    20    4    24    171    93,255 
Residential mortgage                                   
Residential mortgage - term   279,340    8,654    1,350    416    10,420    1,666    291,426 
Residential mortgage - home equity   74,913    577    313    69    959    343    76,215 
Consumer   23,316    287    88    39    414    0    23,730 
Total  $814,860   $11,057   $1,994   $529   $13,580   $11,551   $839,991 

 

Non-accrual loans which have been subject to a partial charge-off totaled $5.0 million as of June 30, 2015, compared to $4.6 million as of December 31, 2014. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $2.1 million at June 30, 2015 and $1.9 million at December 31, 2014.

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

 

 18 
 

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the allocated portion of the Bank’s ALL. In the second quarter of 2015, management determined that it would be prudent to establish an unallocated portion of the ALL to protect the Bank from other risks associated with the loan portfolio that may not be specifically identifiable.

 

The following table summarizes the primary segments of the ALL, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2015 and December 31, 2014:

 

(in thousands)  Commercial
Real Estate
   Acquisition
and
Development
   Commercial
and
Industrial
   Residential
Mortgage
   Consumer   Unallocated   Total 
June 30, 2015                                   
                                    
Individually evaluated for impairment  $30   $1,052   $0   $84   $0   $0   $1,166 
Collectively evaluated for impairment  $2,536   $2,754   $1,007   $3,623   $223   $500   $10,643 
Total ALL  $2,566   $3,806   $1,007   $3,707   $223   $500   $11,809 
                                    
December 31, 2014                                   
                                    
Individually evaluated for impairment  $36   $1,141   $0   $59   $0   $0   $1,236 
Collectively evaluated for impairment  $2,388   $2,771   $1,680   $3,803   $187   $0   $10,829 
Total ALL  $2,424   $3,912   $1,680   $3,862   $187   $0   $12,065 

 

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan (a) is greater than $500,000 or (b) is part of a relationship that is greater than $750,000 and is either (i) in nonaccrual status or (ii) risk-rated Substandard and greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank 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 evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired; otherwise, loans in these segments are considered impaired when they are classified as non-accrual.

 

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or year) end, or if the appraisal is found to be deficient following the Corporation’s internal appraisal review process and re-ordered, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the geographic region where the collateral is located. The discount rates in the appraisal discount grid are updated periodically to reflect the most current knowledge that management has available, including the results of current appraisals. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.

 

 19 
 

 

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2015 and December 31, 2014:

 

   Impaired Loans with Specific
Allowance
   Impaired Loans
with No Specific
Allowance
   Total Impaired Loans 
(in thousands)  Recorded
Investment
   Related
Allowances
   Recorded
Investment
   Recorded
Investment
   Unpaid
Principal
Balance
 
June 30, 2015                         
Commercial real estate                         
Non owner-occupied  $138   $30   $4,492   $4,630   $4,640 
All other CRE   0    0    7,968    7,968    8,459 
Acquisition and development                         
1-4 family residential construction   700    68    0    700    746 
All other A&D   4,472    984    720    5,192    8,933 
Commercial and industrial   0    0    1,474    1,474    2,336 
Residential mortgage                         
Residential mortgage - term   298    84    3,958    4,256    4,622 
Residential mortgage – home equity   0    0    364    364    385 
Consumer   0    0    0    0    0 
Total impaired loans  $5,608   $1,166   $18,976   $24,584   $30,121 
                          
December 31, 2014                         
Commercial real estate                         
Non owner-occupied  $143   $35   $4,353   $4,496   $4,543 
All other CRE   0    0    7,453    7,453    7,944 
Acquisition and development                         
1-4 family residential construction   790    105    0    790    836 
All other A&D   3,615    1,037    2,148    5,763    9,590 
Commercial and industrial   0    0    1,861    1,861    2,723 
Residential mortgage                         
Residential mortgage – term   296    59    3,779    4,075    4,485 
Residential mortgage – home equity   0    0    343    343    363 
Consumer   0    0    0    0    0 
Total impaired loans  $4,844   $1,236   $19,937   $24,781   $30,484 

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

 

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters.

 

 20 
 

 

 

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. “Pass” pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

 

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where, due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs generally remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL. At June 30, 2015, $.5 million of the ALL was considered to be unallocated.

 

 21 
 

  

The following tables present the activity in the ALL for the six- and three-month periods ended June 30, 2015 and 2014:

 

(in thousands)  Commercial
Real Estate
   Acquisition and
Development
   Commercial
and Industrial
   Residential
Mortgage
   Consumer   Unallocated   Total 
ALL balance at January 1, 2015  $2,424   $3,912   $1,680   $3,862   $187   $0   $12,065 
Charge-offs   (287)   (256)   0    (36)   (174)   0    (753)
Recoveries   65    41    20    133    112    0    371 
Provision   364    109    (693)   (252)   98    500    126 
ALL balance at June 30, 2015  $2,566   $3,806   $1,007   $3,707   $223   $500   $11,809 
                                    
ALL balance at January 1, 2014  $4,052   $4,172   $766   $4,320   $284   $0   $13,594 
Charge-offs   (21)   (1,520)   (208)   (566)   (263)   0    (2,578)
Recoveries   10    71    7    156    262    0    506 
Provision   (1,202)   919    988    268    (32)   0    941 
ALL balance at June 30, 2014  $2,839   $3,642   $1,553   $4,178   $251   $0   $12,463 

 

 

(in thousands)  Commercial
Real Estate
   Acquisition and
Development
   Commercial
and Industrial
   Residential
Mortgage
   Consumer   Unallocated   Total 
ALL balance at April 1, 2015  $2,576   $3,692   $1,477   $3,790   $216   $0   $11,751 
Charge-offs   0    (25)   0    (73)   (78)   0    (176)
Recoveries   62    26    13    28    53    0    182 
Provision   (72)   113    (483)   (38)   32    500    52 
ALL balance at June 30, 2015  $2,566   $3,806   $1,007   $3,707   $223   $500   $11,809 
                                    
ALL balance at April 1, 2014  $3,399   $3,896   $1,070   $3,962   $245   $0   $12,572 
Charge-offs   0    (701)   (56)   (98)   (84)   0    (939)
Recoveries   0    59    4    107    83    0    253 
Provision   (560)   388    535    207    7    0    577 
ALL balance at June 30, 2014  $2,839   $3,642   $1,553   $4,178   $251   $0   $12,463 

 

 

The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

 22 
 

 

The following tables present the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

 

   Six Months Ended   Six Months Ended 
   June 30, 2015   June 30, 2014 
(in thousands)  Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized on
a cash basis
   Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized on
a cash basis
 
Commercial real estate                              
Non owner-occupied  $4,224   $78   $0   $1,105   $11   $0 
All other CRE   7,533    55    8    9,936    81    44 
Acquisition and development                              
1-4 family residential construction   760    18    0    1,919    25    0 
All other A&D   5,417    63    0    8,567    96    0 
Commercial and industrial   1,617    47    18    2,126    49    2 
Residential mortgage                              
Residential mortgage - term   4,146    82    2    6,648    107    52 
Residential mortgage – home equity   373    0    2    686    4    1 
Consumer   7    0    0    11    0    0 
Total  $24,077   $343   $30   $30,998   $373   $99 

 

   Three months ended   Three months ended 
   June 30, 2015   June 30, 2014 
(in thousands)  Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized
on a cash
basis
   Average
investment
   Interest
income
recognized on
an accrual
basis
   Interest
income
recognized
on a cash
basis
 
Commercial real estate                              
Non owner-occupied  $4,088   $38   $0   $1,068   $4   $0 
All other CRE   7,574    28    7    9,624    40    43 
Acquisition and development                              
1-4 family residential construction   746    9    0    1,549    11    0 
All other A&D   5,245    31    0    8,329    35    0 
Commercial and industrial   1,495    24    18    2,040    23    0 
Residential mortgage                              
Residential mortgage - term   4,181    42    2    6,489    53    43 
Residential mortgage – home equity   388    0    2    739    1    0 
Consumer   7    0    0    0    0    0 
Total  $23,724   $172   $29   $29,838   $167   $86 

 

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy, remaining competitive in the current interest rate environment, and re-amortizing or extending a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (“TDR”) when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

 

 23 
 

 

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment amount, amortization period, and/or maturity date) are modified in such a way as to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

 

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. Loans may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

 

The volume and type of TDR activity is considered in the assessment of the local economic trends’ qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

 

 24 
 

  

The following tables present the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:

 

   Temporary Rate
Modification
   Extension of Maturity   Modification of Payment and
Other Terms
 
(in thousands)  Number of
 Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
Six Months Ended June 30, 2015                              
Commercial real estate                              
Non owner-occupied   0   $0    1   $3,097    1   $136 
All other CRE   0    0    1    237    5    3,847 
Acquisition and development                              
1-4 family residential construction   0    0    0    0    0    0 
All other A&D   0    0    3    372    0    0 
Commercial and industrial   0    0    1    930    0    0 
Residential mortgage                              
Residential mortgage – term   0    0    2    599    1    116 
Residential mortgage – home equity   0    0    0    0    0    0 
Consumer   0    0    0    0    0    0 
Total   0   $0    8   $5,235    7   $4,099 

 

   Temporary Rate
Modification
   Extension of Maturity   Modification of Payment and
Other Terms
 
(in thousands)  Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
Three months ended June 30, 2015                              
Commercial real estate                              
Non owner-occupied   0   $0    0   $0    0   $0 
All other CRE   0    0    1    237    0    0 
Acquisition and development                              
1-4 family residential construction   0    0    0    0    0    0 
All other A&D   0    0    0    0    0    0 
Commercial and industrial   0    0    1    930    0    0 
Residential mortgage                              
Residential mortgage – term   0    0    0    0    0    0 
Residential mortgage – home equity   0    0    0    0    0    0 
Consumer   0    0    0    0    0    0 
Total   0   $0    2   $1,167    0   $0 

 

During the six months ended June 30, 2015, there were seven new TDRs. In addition, eight existing TDRs which had reached their original modification maturity were re-modified. A $4,324 reduction of the ALL resulted from a change to the impairment evaluation of one loan from evaluated collectively to being evaluated individually. The remaining six new TDRs were impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

 

During the quarter ended June 30, 2015, one residential mortgage loan totaling $70,000 that was modified as a TDR within the previous 12 months was transferred to non-accrual, and is considered a payment default. There were no payment defaults in the quarter ended March 31, 2015.

 

 25 
 

  

   Temporary Rate
Modification
   Extension of Maturity   Modification of Payment and
Other Terms
 
(in thousands)  Number of
 Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded Investment 
Six Months Ended June 30, 2014                              
Commercial real estate                              
Non owner-occupied   0   $0    2   $277    0   $0 
All other CRE   0    0    0    0    4    2,627 
Acquisition and development                              
1-4 family residential construction   0    0    0    0    0    0 
All other A&D   0    0    0    0    0    0 
Commercial and industrial   0    0    0    0    0    0 
Residential mortgage                              
Residential mortgage – term   1    90    0    0    0    0 
Residential mortgage – home equity   0    0    0    0    0    0 
Consumer   0    0    0    0    0    0 
Total   1   $90    2   $277    4   $2,627 

 

   Temporary Rate       Modification of Payment 
   Modification   Extension of Maturity   and Other Terms 
   Number of   Recorded   Number of   Recorded   Number of   Recorded 
(in thousands)  Contracts   Investment   Contracts   Investment   Contracts   Investment 
Three Months Ended June 30, 2014                              
Commercial real estate                              
Non owner-occupied   0   $0    0   $0    0   $0 
All other CRE   0    0    0    0    3    2,173 
Acquisition and development                              
1-4 family residential construction   0    0    0    0    0    0 
All other A&D   0    0    0    0    0    0 
Commercial and industrial   0    0    0    0    0    0 
Residential mortgage                              
Residential mortgage – term   0    0    0    0    0    0 
Residential mortgage – home equity   0    0    0    0    0    0 
Consumer   0    0    0    0    0    0 
Total   0   $0    0   $0    3   $2,173 

 

During the six months ended June 30, 2014, there were two new TDRs. In addition, five existing TDRs which had reached their original modification maturity were re-modified. A $1,055 reduction of the ALL resulted from a change to the impairment evaluation of one loan, from evaluated collectively to being evaluated individually. The remaining new TDR was impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

 

During the quarter ended March 31, 2014, one A&D loan totaling $1.4 million that was modified as a TDR within the previous 12 months was transferred to non-accrual, and is considered a payment default. There were no payment defaults in the quarter ended June 30, 2014.

 

 26 
 

  

Note 8 - Other Real Estate Owned

 

The following table presents the components of Other Real Estate Owned (“OREO”) as of June 30, 2015 and December 31, 2014:

 

(in thousands)  June 30, 2015   December 31, 2014 
Commercial real estate  $1,957   $1,772 
Acquisition and development   7,792    9,263 
Residential mortgage   1,838    1,897 
Total OREO  $11,587   $12,932 

 

The following table presents the activity in the OREO valuation allowance for the six- and three-month periods ended June 30, 2015 and 2014:

 

   For the Six Months Ended   For the Three Months Ended 
   June 30,   June 30, 
(in thousands)  2015   2014   2015   2014 
Balance January 1  $3,440   $4,047   $3,765   $3,670 
Fair value write-down   852    443    346    72 
Sales of OREO   (449)   (748)   (268)   0 
Balance at end of period  $3,843   $3,742   $3,843   $3,742 

 

The following table presents the components of OREO expenses, net for the six- and three-month periods ended June 30, 2015 and 2014:

 

   For the Six Months Ended   For the Three Months Ended 
   June 30,   June 30, 
(in thousands)  2015   2014   2015   2014 
Gains on real estate, net  $(78)  $970   $(51)  $995 
Fair value write-down, net   852    443    346    72 
Expenses, net   456    357    249    169 
Rental and other income   (183)   (156)   (129)   (79)
Total OREO expense, net  $1,047   $1,614   $415   $1,157 

 

Note 9 – Fair Value of Financial Instruments

 

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

 

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

 

 27 
 

 

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

 

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

 

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

 

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. The valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of June 30, 2015 are discussed in the paragraphs that follow.

 

Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

 

The fair value of investments is determined using a market approach. As of June 30, 2015, the U.S. Treasuries, U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.

 

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At June 30, 2015, the Corporation owned 16 pooled trust preferred securities with an amortized cost of $35.6 million and a fair value of $30.0 million. The market for these securities at June 30, 2015 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”) are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at June 30, 2015, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

 

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Management relies on an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between June 30, 2015 and December 31, 2014.

 

The approach used by the third party to determine fair value involves several steps, including detailed credit and structural evaluation of each piece of collateral in each bond, default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

 

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swaps that are classified as Level 3 within the valuation hierarchy. Open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

 

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

 

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned is based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

 

 29 
 

  

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

 

(in thousands)  Fair Value at
June 30, 2015
   Valuation Technique  Significant
Unobservable Inputs
  Significant
Unobservable Input
Value
Recurring:              
               
Investment Securities – available for sale  $30,046   Discounted Cash Flow  Discount Rate  Range of Libor+ 5.50% to 9.50%
               
Cash Flow Hedge  $(140)  Discounted Cash Flow  Reuters Third Party Market Quote  99.9% (weighted avg 99.9%)
               
Non-recurring:              
               
Impaired Loans  $6,592   Market Comparable Properties  Marketability Discount  3% -15% (1)  (weighted avg 12.0%)
               
Other Real Estate Owned  $2,444   Market Comparable Properties  Marketability Discount  6.7% -15.9% (1) (weighted avg 12.9%)

 

(in thousands)  Fair Value at
December 31,
 2014
   Valuation Technique  Significant
Unobservable Inputs
  Significant
Unobservable Input
Value
Recurring:              
               
Investment Securities – available for sale  $25,339   Discounted Cash Flow  Discount Rate  Range of Libor+ 5% to 12%
               
Cash Flow Hedge  $(199)  Discounted Cash Flow  Reuters Third Party Market Quote  99.9% (weighted avg 99.9%)
               
Non-recurring:              
               
Impaired Loans  $9,122   Market Comparable Properties  Marketability Discount  10% (1) (weighted avg 10%)
               
Other Real Estate Owned  $2,511   Market Comparable Properties  Marketability Discount  10% -15% (1) (weighted avg 11%)

 

NOTE:

 

(1)Range would include discounts taken since appraisal and estimated values

 

 30 
 

 

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2015 and December 31, 2014 are as follows:

 

       Fair Value Measurements at June 30, 2015
Using
 
   Assets
Measured at
Fair Value
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  6/30/2015   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
Investment securities available-for-sale:                   
U.S. treasuries  $10,075        $10,075      
U.S. government agencies  $44,095        $44,095      
Residential mortgage-backed agencies  $19,963        $19,963      
Commercial mortgage-backed agencies  $42,866        $42,866      
Collateralized mortgage obligations  $13,179        $13,179      
Obligations of states and political subdivisions  $45,002        $45,002      
Collateralized debt obligations  $30,046             $30,046 
Financial Derivative  $(140)            $(140)
Non-recurring:                    
Impaired loans  $6,592             $6,592 
Other real estate owned  $2,444             $2,444 

 

       Fair Value Measurements at December 31, 2014
Using
 
   Assets
Measured at
Fair Value
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  12/31/2014   (Level 1)   (Level 2)   (Level 3) 
Recurring:                    
Investment securities available-for-sale:                    
U.S. treasuries  $29,596       $29,596      
U.S. government agencies  $38,941        $38,941      
Residential mortgage-backed agencies  $45,273        $45,273      
Commercial mortgage-backed agencies  $25,957        $25,957      
Collateralized mortgage obligations  $8,707        $8,707      
Obligations of states and political subdivisions  $47,304        $47,304      
Collateralized debt obligations  $25,339             $25,339 
Financial Derivative  $(199)            $(199)
Non-recurring:                    
Impaired loans  $9,122             $9,122 
Other real estate owned  $2,511             $2,511 

 

There were no transfers of assets between any of the fair value hierarchy for the six-month periods ended June 30, 2015 and 2014.

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The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six- and three-month periods ended June 30, 2015 and 2014:

 

   Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
(In thousands)   Investment Securities
Available for Sale
   Cash Flow Hedge 
Beginning balance January 1, 2015  $25,339   $(199)
Total gains realized/unrealized:          
Included in other comprehensive income   4,707    59 
Ending balance June 30, 2015  $30,046   $(140)
           
The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date  $0   $0 

 

   Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
(in thousands)   Investment Securities
Available for Sale
   Cash Flow Hedge 
Beginning balance January 1, 2014  $17,538   $(457)
Total gains realized/unrealized:          
Included in other comprehensive income   6,383    185 
Ending balance June 30, 2014  $23,921   $(272)
           
The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date  $0   $0 

  

   Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
(in thousands)   Investment Securities
Available for Sale
   Cash Flow Hedge 
Beginning balance April 1, 2015  $28,391   $(164)
Total gains realized/unrealized:          
Included in other comprehensive income   1,655    24 
Ending balance June 30, 2015  $30,046   $(140)
           
The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date  $0   $0 

 

 32 
 

  

   Fair Value Measurement Using Significant
Unobservable Inputs (Level 3)
 
(in thousands)   Investment Securities
Available for Sale
   Cash Flow Hedge 
Beginning balance April 1, 2014  $23,093   $(365)
Total gains realized/unrealized:          
Included in other comprehensive income   828    93 
Ending balance June 30, 2014  $23,921   $(272)
           
The amount of total gains or losses for the period included in earnings attributable to the change in realized/unrealized gains or losses related to assets still held at the reporting date  $0   $0 

 

Gains (realized and unrealized) included in earnings for the periods identified above are reported in the Consolidated Statement of Operations in Other Operating Income.

 

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

 

The following methods and assumptions were used by the Corporation to estimate its fair value disclosures for financial instruments:

 

Cash and due from banks: The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values.

 

Interest bearing deposits in banks: The carrying amount of interest bearing deposits approximates their fair values.

 

Securities held to maturity: Investments in debt securities classified as held to maturity are measured subsequently at amortized cost in the statement of financial position.

 

Restricted investment in bank stock: The carrying value of stock issued by the FHLB of Atlanta, ACBB and CBB approximates fair value based on the redemption provisions of the stock.

 

Loans (excluding impaired loans with specific loss allowances): For variable-rate loans that re-price frequently or “in one year or less”, and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans that do not re-price frequently are estimated using a discounted cash flow calculation that applies current market interest rates being offered on the various loan products.

 

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts, etc.) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream.

 

Borrowed funds: The fair value of the Bank’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of contractual cash flows, using rates currently existing for borrowings with similar remaining maturities. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate their fair values.

 

Accrued interest: The carrying amount of accrued interest receivable and payable approximates their fair values.

 

 33 
 

   

Off-balance-sheet financial instruments: In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. The Bank expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. Due to the uncertainty of cash flows and difficulty in the predicting the timing of such cash flows, fair values were not estimated for these instruments.

 

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

 

   June 30, 2015   Fair Value Measurements 
   Carrying   Fair   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets:                    
Cash and due from banks  $54,913   $54,913   $54,913           
Interest bearing deposits in banks   2,991    2,991    2,991           
Investment securities - AFS   205,226    205,226        $175,180   $30,046 
Investment securities - HTM   107,816    108,417         105,792    2,625 
Restricted bank stock   7,180    7,180         7,180      
Loans, net   833,281    836,619              836,619 
Accrued interest receivable   4,105    4,105         4,105      
                          
Financial Liabilities:                         
Deposits – non-maturity   726,054    726,054         726,054      
Deposits – time deposits   277,041    281,345         281,345      
Short-term borrowed funds   28,252    28,252         28,252      
Long-term borrowed funds   177,572    181,514         181,514      
Accrued interest payable   848    848         848      
Financial derivative   140    140              140 
Off balance sheet financial instruments   0    0    0           

 

 34 
 

 

   December 31, 2014   Fair Value Measurements 
   Carrying   Fair   Quoted Prices in
Active Markets for
Identical Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
(in thousands)  Amount   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets:                         
Cash and due from banks  $27,554   $27,554   $27,554           
Interest bearing deposits in banks   7,897    7,897    7,897           
Investment securities - AFS   221,117    221,117        $195,778   $25,339 
Investment securities - HTM   109,449    110,771         108,163    2,608 
Restricted bank stock   7,524    7,524         7,524      
Loans, net   827,926    830,904              830,904 
Accrued interest receivable   4,152    4,152         4,152      
                          
Financial Liabilities:                         
Deposits- non-maturity   689,581    689,581         689,581      
Deposits- time deposits   291,742    296,713         296,713      
Short-term borrowed funds   39,801    39,801         39,801      
Long-term borrowed funds   182,606    187,143         187,143      
Accrued interest payable   882    882         882      
Financial derivative   199    199              199 
Off balance sheet financial instruments   0    0    0           

  

Loans are measured using a discounted cash flow method. The significant unobservable inputs used in the Level 3 fair value measurements of the Corporation’s loans included in the tables above are calculated based on the Corporation’s internal new volume rate.

 

 35 
 

 

Note 10 – Accumulated Other Comprehensive Loss

 

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2014 and the three-month periods ended March 31, 2015 and June 30, 2015:

 

(in thousands)  Investment
 securities-
with OTTI
AFS
   Investment
securities-
all other

AFS
   Investment
securities-
HTM
   Cash Flow
Hedge
   Pension
Plan
   SERP   Total 
Accumulated OCL, net:                            
Balance - January 1, 2014  $(7,623)  $(11,292)  $0   $(274)  $(5,088)  $64   $(24,213)
Other comprehensive income/(loss) before reclassifications   4,349    8,712    (2,395)   155    (6,513)   (319)   3,989 
Amounts reclassified from accumulated other comprehensive income   (405)   25    140    0    209    22    (9)
Balance - December 31, 2014  $(3,679)  $(2,555)  $(2,255)  $(119)  $(11,392)