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EX-99 - EXHIBIT 99.3 - C & F FINANCIAL CORPex99-3.htm
EX-23 - EXHIBIT 23.1 - C & F FINANCIAL CORPex23-1.htm
EX-99 - EXHIBIT 99.1 - C & F FINANCIAL CORPex99-1.htm

 

EXHIBIT 99.2

 

 

 

 

 

 

 

Consolidated Financial Statements

As of and for the Three and Nine Months Ended

September 30, 2013 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CENTRAL VIRGINIA BANKSHARES, INC.

 

 

INDEX

 

Page No.

 

Financial Statements

 
   

Consolidated Balance Sheets -

 

September 30, 2013 (Unaudited) and December 31, 2012

3

   

Consolidated Statements of Operations – Three and Nine Months

  

Ended September 30, 2013 and 2012 (Unaudited)

4

   

Consolidated Statements of Comprehensive Income (Loss) – Three and Nine

 

Months Ended September 30, 2013 and 2012 (Unaudited)

5

   

Consolidated Statements of Stockholders’ Equity - Nine

 

Months Ended September 30, 2013 and 2012 (Unaudited)

6

   

Consolidated Statements of Cash Flows - Nine

 

Months Ended September 30, 2013 and 2012 (Unaudited)

7

   

Notes to Consolidated Financial Statements -

 

September 30, 2013 and 2012 (Unaudited)

8

  

 
2

 

 

 

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2013 and December 31, 2012

(Dollars in thousands except per share amounts)

 

 

September 30, 2013

 

December 31, 2012

 

ASSETS

(Unaudited)

 

(Audited)

Cash and due from banks

$9,642

 

$ 8,341

Federal funds sold

50,133

 

13,831

 

Total cash and cash equivalents

59,775

 

22,172

       

Securities available for sale at fair value

119,916

 

145,678

Securities held to maturity at amortized cost (fair value 2012 - $1,355)

-

 

1,355

Total securities

119,916

 

147,033

       

Loans, net of unearned income

171,247

 

194,668

Less allowance for loan losses

(6,433)

 

(7,167)

 

Net loans

164,814

 

187,501

Bank premises and equipment, net

7,448

 

7,772

Accrued interest receivable

1,020

 

1,435

Bank owned life insurance

11,263

 

10,996

Other real estate owned, net of valuation allowance of $222 and $745, respectively

895

 

4,793

Other assets

4,381

 

5,298

 

Total assets

$369,512

 

$387,000

       
 

LIABILITIES AND STOCKHOLDERS' EQUITY

     

LIABILITIES

     

Deposits:

     

Non-interest bearing demand deposits

$40,046

 

$38,671

Interest bearing demand deposits and NOW accounts

100,741

 

103,920

Savings deposits

47,092

 

44,269

Time deposits, $100,000 and over

38,709

 

41,471

Other time deposits

87,123

 

95,604

Total deposits

313,711

 

323,935

       

FHLB borrowings

40,000

 

40,000

Capital trust preferred securities

5,155

 

5,155

Accrued interest payable

911

 

796

Other liabilities

3,773

 

2,905

 

Total liabilities

$363,550

 

$372,791

STOCKHOLDERS’ EQUITY

     

Preferred stock, $1.25 par value, $1,000 liquidation value, 1,000,000 shares authorized

     

    and 11,385 shares issued and outstanding

$11,385

 

$11,385

Common stock, $1.25 par value; 30,000,000 shares authorized; 2013: issued and outstanding 2,646,559 shares and 2012: issued and outstanding 2,665,999 (includes 30,643 of nonvested shares)

3,308

 

3,294

Common stock warrant

412

 

412

Discount on preferred stock

(71)

 

(126)

Surplus

16,901

 

16,938

Retained deficit

(16,711)

 

(14,217)

Accumulated other comprehensive loss

(9,262)

 

(3,477)

 

Total stockholders’ equity

5,962

 

14,209

 

Total liabilities and stockholders’ equity

$369,512

 

$387,000

 

See Notes to Consolidated Financial Statements.

 

 
3

 

 

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands except per share data)

(Unaudited)

 

       

Three Months Ended

 

Nine Months Ended

       

September 30,

 

September 30,

       

2013

 

2012

 

2013

 

2012

Interest income:

             

   Interest and fees on loans

$2,227

 

$2,665

 

$7,015

 

$8,664

   Interest on securities and federal funds sold:

             

      U.S. Government Treasury notes, agencies and corporations

397

 

381

 

1,296

 

1,291

      States and political subdivisions

62

 

119

 

192

 

504

      Corporate and other

108

 

105

 

327

 

500

      Interest on federal funds sold

25

 

5

 

49

 

22

Total interest income

2,819

 

3,275

 

8,879

 

10,981

               

Interest expense:

             

   Interest on deposits

523

 

667

 

1,639

 

2,191

   Interest on borrowings:

             

      FHLB borrowings

368

 

368

 

1,094

 

1,097

      Capital trust preferred securities

45

 

46

 

132

 

137

Total interest expense

936

 

1,081

 

2,865

 

3,425

     Net interest income

1,883

 

2,194

 

6,014

 

7,556

Provision for loan losses

400

 

524

 

700

 

2,074

 Net interest income after provision for loan losses

1,483

 

1,670

 

5,314

 

5,482

Non-interest income

             

   Deposit fees and charges

304

 

344

 

881

 

1,031

   Other service charges, commission and fees

212

 

218

 

675

 

657

   Increase in cash surrender value of life insurance

93

 

94

 

267

 

283

   Realized gains on sales/calls of securities and loans held for sale

1

 

768

 

31

 

2,184

   Other operating income

63

 

191

 

264

 

311

        Total non-interest income

673

 

1,615

 

2,118

 

4,466

Non-interest expense:

             

    Salaries and benefits

1,450

 

1,279

 

3,910

 

3,849

    Occupancy expenses

296

 

280

 

886

 

809

    Furniture and equipment expenses

98

 

114

 

304

 

352

    FDIC insurance expense

213

 

215

 

648

 

590

    Loss on securities write-down (1)

-

 

-

 

-

 

6

    Loss on other real estate owned and costs of operation

10

 

220

 

62

 

726

    Other operating expenses

1,799

 

992

 

4,061

 

2,922

        Total non-interest expenses

3,866

 

3,100

 

9,871

 

9,254

Income (loss) before income taxes

(1,710)

 

185

 

(2,439)

 

694

Income tax expense

-

 

-

 

-

 

-

Net income (loss)

$(1,710)

 

$185

 

$(2,439)

 

$694

Effective dividends accrued on preferred stock

161

 

161

 

481

 

481

        Net income (loss) available to common stockholders

$(1,871)

 

$24

 

$(2,920)

 

$213

Income (loss) per common share, basic

$(0.70)

 

$0.01

 

$(1.10)

 

$0.08

Income (loss) per common share, diluted

$(0.70)

 

$0.01

 

$(1.10)

 

$0.08

 

(1) Total of other-than-temporary impairment losses on securities in the nine months ended September 30, 2012 is $716 thousand of which $710 thousand have been recognized in other comprehensive loss, and impairment losses of $6 thousand have been recognized in earnings in the nine months ended September 30, 2012.

 

See Notes to Consolidated Financial Statements.

 

 
4

 

 

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(Unaudited)

 

       

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2013

 

2012

 

2013

 

2012

Net income (loss)

$(1,710)

 

$185

 

$(2,439)

 

$694

Other comprehensive income (loss):

             

      Unrealized holding (losses) gains arising during the period

$(1,134)

 

$1,017

 

$(5,754)

 

$3,585

      Less: reclassification adjustment for gains included in net income (1)

(1)

 

(745)

 

(31)

 

(2,161)

      Less: reclassification adjustment for loss on write-down of securities (2)

-

 

-

 

-

 

6

Other comprehensive income (loss)

$(1,135)

 

$272

 

$(5,785)

 

$1,430

               

Comprehensive income (loss)

$(2,845)

 

$457

 

$(8,224)

 

$2,124

 

 

(1)

These items are included in “Realized gains on available for sale securities” on the income statement.

 

(2)

These items are included in “Loss on securities write-down” on the income statement.

 

See Notes to Consolidated Financial Statements.

 

 
5

 

  

CENTRAL VIRGINIA BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2013 and 2012

(dollars in thousands, except share amounts) 

(Unaudited)

 

 

Preferred

Stock

Common

Stock

Surplus

Retained

Earnings

(Deficit)

Common

Stock

Warrant

Discount on

Preferred Stock

Accumulated

Other

Comprehensive

(Loss)

Total

Balance, December 31, 2011

$ 11,385

$ 3,282 

$16,924 

$ (14,358) 

$412 

 $(199)

     $(4,882)

$12,564 

Net income

-

-

-

694 

-

-

 

694

Other comprehensive income

-

-

-

-

-

-

1,430

1,430 

Accretion of preferred stock discount

-

-

-

(55)

-

55

-

-

Issuance of 9,379 shares of common stock pursuant to the vesting of restricted stock

-

12

(12)

-

-

-

-

-

Stock based compensation

-

-

21

 -

-

-

-

21 

Balance, September 30, 2012

$ 11,385

$3,294 

 $16,933 

$(13,719) 

$412 

$ (144)

     $(3,452)

$14,709 

                 

Balance, December 31, 2012

$ 11,385

     $3,294 

$16,938 

$ (14,217)

$412 

$ (126)

$ (3,477)

$14,209 

Net income (loss)

-

-

-

(2,439)

-

-

-

(2,439)

Other comprehensive income (loss)

-

-

-

-

-

-

(5,785)

(5,785) 

Accretion of preferred stock discount

-

-

-

(55)

-

55

-

                       -

Issuance of 11,203 shares of common stock pursuant to the vesting of restricted stock

-

14

(14)

-

-

-

-

-

Stock based compensation, net of forfeitures

-

-

(23)

-

-

-

-

(23)

Balance, September 30, 2013

$11,385 

     $3,308 

$16,901 

$ (16,711)

$412 

$ (71)

$ (9,262)

$5,962 

 

See Notes to Consolidated Financial Statements.

 

 
6

 

 

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2013 and 2012

(amounts in thousands except share amounts)

(Unaudited)

 

   

2013

   

2012

 

Cash Flows from Operating Activities

           

Net income (loss)

  $(2,439 )   $694  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

           

Depreciation and amortization

  356     437  

Provision for loan losses

  700     2,074  

Stock based compensation, net

  (23 )   21  

Amortization and accretion on securities, net

  1,197     1,153  

Proceeds from sale of loans held for resale

  -     330  

Realized gains on available for sale securities

  (31 )   (2,161 )

Realized (gain) loss on sale of other real estate owned

  (15 )   17  

Realized gain on sale of building

  -     (147 )

Realized gain on sale of loans held for resale

  -     (23 )

Loss on write-down in value of other real estate owned

  108     540  

Loss on write-down of other than temporary impairment of securities

  -     6  

Increase in cash surrender value of life insurance

  (267 )   (283 )

Change in operating assets and liabilities:

           

Decrease in assets:

           

Accrued interest receivable

  415     61  

Other assets

  941     481  

Increase in liabilities:

           

Accrued interest payable and other liabilities

  983     47  

Net cash provided by operating activities

  1,925     3,247  
             

Cash Flows from Investing Activities

           

Proceeds from calls and maturities of securities held to maturity

  1,355     -  

Proceeds from calls and maturities of securities available for sale

  19,202     35,323  

Proceeds from sales of securities available for sale

  40,067     121,151  

Purchase of securities available for sale

  (40,493 )   (179,515 )

Proceeds from the sale of OREO

  4,086     3,573  

Net decrease in loans made to customers

  21,706     18,895  

Net purchases of premises and equipment

  (21 )   125  

Net cash provided by (used in) investing activities

  45,902     (448 )
             

Cash Flows from Financing Activities

           

Net increase in demand deposits, MMDA, NOW, and savings accounts

  1,019     8,833  

Net decrease in time deposits

  (11,243 )   (19,111 )

Net decrease in securities sold under repurchase agreements

  -     (1,393 )

Net cash used in financing activities

  (10,224 )   (11,671 )
             

Increase (decrease) in cash and cash equivalents

  $37,603     $(8,872 )

Cash and cash equivalents:

           

Beginning

  22,172     46,345  

Ending

  $59,775     $37,473  

Supplemental Disclosures of Cash Flow Information

           

Cash payments for: Interest

  $2,750     $3,341  

Income taxes

  -     -  

Non-cash investing and financing activities:

           

Unrealized (loss) gain on securities available for sale, net

  $(5,785 )   $1,430  

Loans transferred to other real estate owned

  $281     $2,834  

 

See Notes to Consolidated Financial Statements.

 

 
7

 

  

CENTRAL VIRGINIA BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and 2012

(Unaudited)

 

Note 1. Basis of Presentation

 

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Central Virginia Bankshares, Inc., and its subsidiaries, Central Virginia Bank, including its subsidiary, CVB Title Services, Inc. and Central Virginia Bankshares Statutory Trust I. All significant intercompany transactions and balances have been eliminated in consolidation. ASC Topic 810 Consolidations requires that the Company no longer eliminate through consolidation the equity investment in Central Virginia Bankshares Statutory Trust I by the parent company, Central Virginia Bankshares, Inc., which equaled $155 thousand at September 30, 2013. The subordinated debt of the Trust is reflected as a liability on the Company’s balance sheet. When we refer to “the Company,” “we,” “our” or “us” we mean Central Virginia Bankshares, Inc. (consolidated). When we refer to “Central Virginia Bank” or “the Bank”, we mean Central Virginia Bank (subsidiary).

 

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.

 

In our opinion, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2013, the results of operations and comprehensive income (loss) for the three and nine month periods ended September 30, 2013 and 2012, and cash flows and statements of changes in stockholders’ equity for the nine months ended September 30, 2013 and 2012. The statements should be read in conjunction with Notes to Consolidated Financial Statements included in the annual report for the year ended December 31, 2012. The results of operations for the three and nine month periods ended September 30, 2013 and 2012 are not necessarily indicative of the results to be expected for the full year.

 

The consolidated financial statements of Central Virginia Bankshares, Inc. (the Company) and its wholly-owned subsidiary, Central Virginia Bank (the Bank), include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentations.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

 

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

 

 
8

 

 

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

 

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated financial statements.

 

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this ASU permit the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

 

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this Update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

 

 
9

 

 

Note 2. Securities

 

Securities Available for Sale

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale at September 30, 2013 and December 31, 2012 are summarized as follows:

 

 

September 30, 2013

(Unaudited)

(Dollars in 000’s)

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Approximate

Fair

Value

U.S. Treasury securities

$2,011

          $-

$ (163)

$1,848

U.S. government agencies & corporations

33,779

-

(3,050)

30,729

Bank eligible preferred and equities

2,152

9

(159)

2,002

Mortgage-backed securities (1)

72,239

62

(3,192)

69,109

Corporate and other debt

9,535

1,463

(3,571)

7,427

States and political subdivisions

9,462

-

(661)

8,801

 

$129,178

$1,534

$ (10,796)

$119,916

 

 

 

December 31, 2012

(Dollars in 000’s)

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Approximate

Market

Value

U.S. Treasury securities

$ 7,213

$11 

$(55) 

$7,169 

U.S. government agencies & corporations

59,655

133

(253)

59,535

Bank eligible preferred and equities

2,202

9

(71)

2,140

Mortgage-backed securities (1)

59,518

377

(100)

59,795

Corporate and other debt

10,005

6

(3,463)

6,548

States and political subdivisions

10,562

49

(120)

10,491

 

$149,155 

$585 

$(4,062)

$145,678 

 

 

(1)

At September 30, 2013 and December 31, 2012, GNMA securities represented 77% and 69% of the total market value of mortgage-backed securities, respectively.

 

 
10

 

 

The following tables present the gross unrealized losses and fair values as of September 30, 2013 and December 31, 2012, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:

 

(Dollars in 000’s)

September 30, 2013

(Unaudited)

 

Less than twelve months

Twelve months or longer

Total

Securities Available for Sale

Approximate

Fair

Value

Unrealized

Losses

Approximate

Market

Value

Unrealized

Losses

Approximate

Market

Value

Unrealized

Losses

U.S. Treasury securities

$1,848

$(163)

$-

$-

$1,848

$(163)

U.S. government agencies & corporations

30,729

(3,050)

-

-

30,729

(3,050)

Bank eligible preferred and equities

948

(154)

71

(5)

1,019

(159)

Mortgage-backed securities

65,015

(3,164)

1,370

(28)

66,385

(3,192)

Corporate and other debt

75

(1,593)

7,231

(1,978)

7,306

(3,571)

States and political subdivisions

5,602

(460)

3,199

(201)

8,801

(661)

 

$104,217

$ (8,584)

$11,871

$ (2,212)

$116,088

$(10,796)

 

 

December 31, 2012

 

Less than twelve months

Twelve months or longer

Total

 

Securities Available for Sale

Approximate

Fair

Value

Unrealized

Losses

Approximate

Market

Value

Unrealized

Losses

Approximate

Market

Value

Unrealized

Losses

U.S. Treasury securities

$7,070

$(55)

$-

$-

$7,070

$(55)

U.S. government agencies & corporations

30,023

(253)

-

-

30,023

(253)

Bank eligible preferred and equities

-

-

2,006

(71)

2,006

(71)

Mortgage-backed securities

17,789

(100)

-

-

17,789

(100)

Corporate and other debt

830

(170)

5,286

(3,293)

6,116

(3,463)

States and political subdivisions

7,305

(117)

272

(3)

7,577

(120)

 

$63,017 

$(695)

$7,564 

$(3,367)

$70,581 

$(4,062)

 

Changes in market interest rates and changes in credit spreads may result in temporary impairment or unrealized losses, as the fair value of securities will fluctuate in response to these market factors. Of the securities in a net unrealized loss position longer than 12 months as of September 30, 2013, $2.0 million of the total $2.2 million unrealized loss is in the corporate and other debt category where the Company has a number of corporate debt securities issued by companies within the financial sector, and other pooled trust preferred securities where the underlying instruments are commercial bank or insurance company trust preferred issues. Due to the multitude of economic issues, and the resulting general market unrest, most all of the financial sector debt instruments have experienced historical lows in their market value. While this is not considered a permanent condition, the Company cannot predict with any degree of accuracy when prices will return to historical levels.

 

The primary relevant factors considered by us in our evaluation to determine if the impairment is other than temporary are the relationship of current market interest rates as compared to the fixed coupon rate of the securities, credit risk (all the issuers of the securities had investment grade credit ratings or better at the time the securities were purchased), the continued ability to maintain payment of the dividend or coupon, continuation as a going concern, adverse market factors, and any other significant adverse factors. The compilation of these factors leads to a determination that if the overall evidence suggests that the Company can recover substantially all of our entire investment in the securities within a reasonable period of time, the impairment is considered temporary. The Company did not record an Other Than Temporary Impairment (OTTI) during the first nine months of 2013; however, $6 thousand in OTTI was recorded in the nine months ended September 30, 2012. There was no OTTI recorded in the three months ended September 30, 2013 and 2012.

 

 
11

 

 

As of September 30, 2013, the Company had two pooled trust preferred securities that were deemed to be OTTI based on a present value analysis of expected future cash flows. These securities had a fair value of $1.1 million and an unrealized loss of $1.0 million, of which $178 thousand was recognized in other comprehensive loss and $795 thousand was recognized in earnings. The following table provides further information on these securities as of September 30, 2013 (in thousands):

 

Security

Class

Current

Moody’s

Ratings

(Lowest

Assigned

Rating)

 

Amortized

Cost

   

Book

Value/

Fair

Value

   

Unrealized

Loss

   

Cumulative

Other

Comprehensive

(Gain) Loss (1)

   

Amount of

OTTI

Related to

Credit

Loss (1)

 

PreTSL XII

B-3

Caa3

  $1,871     $917     $954     $173     $781  

Preferred CPO Ltd

B/C

Ba3

  195     176     19     5     14  
        $2,066     $1,093     $973     $178     $795  
 

(1)

Pre-tax-OTTI recorded in prior periods.

 

As of September 30, 2013, the Company had three pooled trust preferred securities that were deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The securities had a fair value of $2.0 million. The following table provides further information on these securities as of September 30, 2013 (in thousands):

 

Security

Class

Current

Moody’s

Ratings

(Lowest

Assigned

Rating)

 

Amortized

Cost

   

Book

Value/

Fair

Value

   

Unrealized

Loss

   

Cumulative

Other

Comprehensive

Loss (1)

   

Amount of

OTTI

Related to

Credit

Loss (1)

 

PreTSL XXIII

C-2

Ca

  $490     $238     $252     $252     $ -  

i-PreTSL III

B-3

Ba3

  1,500     1,077     423     423     -  

i-PreTSL IV

B-2

Ba2

  1,000     690     310     310     -  
        $2,990     $2,005     $985     $985     $ -  
 

(1)

Pre-tax.

 

The Company’s investment in Federal Home Loan Bank (FHLB) stock totaled $2.3 million at September 30, 2013 and $2.4 million at December 31, 2012. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2013 and no impairment has been recognized. FHLB stock is included with other assets on the consolidated balance sheets and is not a part of the available for sale securities portfolio.

 

 
12

 

 

 

The following table presents a roll-forward of the cumulative credit loss component amount of OTTI recognized in earnings:

 

(Dollars in 000’s)

 

Three Months Ended

September 30, 2013

   

Three Months Ended

September 30, 2012

   

Nine Months

Ended

September 30, 2013

   

Nine Months

Ended

September 30, 2012

 

Balance, beginning of period

  $19,701     $21,331     $19,701     $25,913  

Additions:

                       

Initial credit impairments

  -     -     -     -  

Subsequent credit impairments

  -     -     -     6  

Reduction: sales of securities

  -     -           (4,588 )

Balance, end of period

  $19,701     $21,331     $19,701     $21,331  

 

Available for Sale Securities with an amortized cost of $13.3 million and $36.9 million and a market value of $12.7 million and $36.9 million at September 30, 2013 and December 31, 2012, respectively, were pledged as collateral for repurchase agreement borrowings with correspondent banks and public deposits and for other purposes as required or permitted by law.

 

Securities Held to Maturity

 

The amortized cost, gross unrealized gains and losses and estimated fair value of securities being held to maturity at December 31, 2012 are summarized as follows:

 

   

December 31, 2012

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Approximate

Market

Value

 

States and political subdivisions

  $1,355     $-     $-     $1,355  

 

The Company had no securities held to maturity at September 30, 2013 as all such securities were called or matured during the first quarter of 2013.

 

 

 
13

 

 

Note 3. Loans and allowance for loan losses

 

Major classifications of our loans as of September 30, 2013 and December 31, 2012 are summarized as follows:

 

(Dollars in 000’s)

September 30,

2013

(Unaudited)

December 31,

2012

Commercial

$14,326

$18,538 

Real Estate:

 

 

   Residential

50,458

59,814

   Commercial

52,983

56,185

   Home equity

21,639

23,799

   Construction

28,739

32,792

      Total real estate

153,819

172,590

     

Bank cards

886

961

Installment

2,513

2,807

 

171,544

194,896

Less unearned income

(297)

(228)

Loans, net of unearned income

$171,247

$194,668

Allowance for loan losses

(6,433)

(7,167)

Loans, net

$164,814

$187,501 

 

Credit Quality. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. For consumer and residential loans, the Company believes that performance and delinquency status is a better indicator of credit quality, therefore, the Company does not generally risk grade real estate mortgage, real estate home equity or installment loans. In general, commercial loans are risk graded; however, there may be certain instances whereby these loans are not risk graded, such as when loans are approved by branch lenders under their loan authority. In general, construction loans are risk graded; however, in instances where construction loans are for residential purposes, these loans are considered to be consumer loans and are not risk graded.

 

The Company’s internally assigned grades are as follows:

 

Pass – No change in credit rating of borrower and loan-to-value ratio of asset;

Weak Pass – Weakening of borrower’s debt capacity, earnings and cash flows;

Special Mention – Deterioration in the credit rating of borrower;

Sub-Standard – Deteriorating financial position of borrower, possibility of loss exists if corrective action is not taken;

Doubtful – Bankruptcy exists or is highly probable; and

Loss – Borrowers deemed incapable of repayment of debt.

 

 
14

 

 

The following table represents credit exposures by internally assigned grades as of September 30, 2013.

 

   

September 30, 2013 (unaudited)

 

(Dollars in 000’s)

 

Commercial

   

Real

Estate -Residential

   

Real

Estate -Commercial

   

Real

Estate –

Home

Equity

   

Real

Estate -Construction

   

Bank

Cards

   

Installment

   

Total

 

Pass

  $ 5,241     $ 5,176     $15,945     $1,069     $ 3,287     $-     $ 18     $ 30,736  

Weak Pass

  5,894     12,217     27,534     2,652     7,696     -     41     56,034  

Special Mention

  248     1,555     2,116     -     1,343     -     -     5,262  

Sub-Standard

  2,826     5,879     7,388     397     15,687     -     43     32,220  

Doubtful

  -     -     -     -     -     -     -     -  

Total

  $14,209     $24,827     $52,983     $4,118     $28,013     $-     $102     $124,252  

 

The following table shows a breakdown of loans that are not risk rated in the table above:

 

(Dollars in 000’s)

 

September 30, 2013 (unaudited)

 
   

Performing

   

Non-Performing

   

Total

 

Commercial

  $117     $-     $117  

Real Estate – Residential

  24,215     1,416     25,631  

Real Estate – Commercial

  -     -     -  

Real Estate – Home Equity

  17,001     520     17,521  

Real Estate - Construction

  726     -     726  

Bank Cards

  882     4     886  

Installment

  2,384     27     2,411  

Total

  $45,325     $1,967     $47,292  

 

The following table represents credit exposures by internally assigned grades for the year ended December 31, 2012.

 

   

December 31, 2012

 

(Dollars in 000’s)

 

Commercial

   

Real

Estate -Residential

   

Real

Estate -Commercial

   

Real

Estate –

Home

Equity

   

Real

Estate -Construction

   

Bank

Cards

   

Installment

   

Total

 

Pass

  $7,879     $5,587     $15,766     $1,064     $1,773     $-     $10     $32,079  

Weak Pass

  6,082     14,110     27,774     1,735     7,919     -     44     57,664  

Special Mention

  2,789     3,914     3,397     1,350     2,049     -     -     13,499  

Sub-Standard

  1,444     5,613     9,101     349     20,009     -     51     36,567  

Doubtful

  -     -     -     -     -     -     -     -  

Loss

  -     -     -     -     -     -     -     -  

Total

  $18,194     $29,224     $56,038     $4,498     $31,750     $-     $105     $139,809  

 

The following table shows a breakdown of loans that are not risk rated in the table above:

 

(Dollars in 000’s)

 

December 31, 2012

 
   

Performing

   

Non-Performing

   

Total

 

Commercial

  $344     $-     $344  

Real Estate – Residential

  28,323     2,267     30,590  

Real Estate – Commercial

  147     -     147  

Real Estate – Home Equity

  18,926     375     19,301  

Real Estate - Construction

  971     71     1,042  

Bank Cards

  912     49     961  

Installment

  2,623     79     2,702  

Total

  $52,246     $2,841     $55,087  

 

 
15

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2013 and the Company’s recorded investment in loans as of September 30, 2013 related to each balance in the allowance for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

   

September 30, 2013 (unaudited)

 

(Dollars in 000’s)

 

Commercial

   

Real

Estate -Residential

   

Real

Estate -Commercial

   

Real

Estate –

Home

Equity

   

Real

Estate -

Construction

   

Bank

Cards

   

Installment

   

Total

 

Beginning balance

  $1,100     $1,259     $1,327     $291     $2,978     $21     $191     $7,167  

Recoveries credited to allowance

  18     14     2     -     39     7     45     125  

Loans charged-off

  (387 )   (871 )   (2 )   (15 )   (185 )   (29 )   (70 )   (1,559 )

Provision for loan losses

  431     1,032     (302 )   (56 )   (317 )   16     (104 )   700  

Ending balance - allowance for loan loss

  $1,162     $1,434     $1,025     $220     $2,515     $15     $62     $6,433  
                                                 

Period-end amount allocated to:

                                               

Loans individually evaluated for impairment

  $480     $281     $606     $-     $783     $-     $6     $2,156  

Loans collectively evaluated for impairment

  682     1,153     419     220     1,732     15     56     4,277  

Ending balance – allowance for loan loss

  $1,162     $1,434     $1,025     $220     $2,515     $15     $62     $6,433  
                                                 

Ending balance – loans

  $14,326     $50,458     $52,983     $21,639     $28,739     $886     $2,513     $171,544  
                                                 

Loans individually evaluated for impairment

  $2,471     $4,508     $8,832     $32     $13,453     $-     $7     $29,303  

Loans collectively evaluated for impairment

  11,855     45,950     44,151     21,607     15,286     886     2,506     142,241  

Ending balance – loans

  $14,326     $50,458     $52,983     $21,639     $28,739     $886     $2,513     $171,544  

 

 

 
16

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2012 and the Company’s recorded investment in loans as of December 31, 2012 related to each balance in the allowance for loan losses.

 

   

December 31, 2012

 

(Dollars in 000’s)

 

Commercial

   

Real

Estate –Residential

   

Real

Estate -Commercial

   

Real

Estate –

Home

Equity

   

Real

Estate -Construction

   

Bank

Cards

   

Installment

   

Total

 

Beginning balance

  $1,700     $956     $650     $82     $5,416     $18     $500     $9,322  

Recoveries credited to allowance

  28     68     2     -     -     1     60     159  

Loans charged-off

  (117 )   (992 )   (271 )   (398 )   (2,888 )   (55 )   (292 )   (5,013 )

Provision for loan losses

  (511 )   1,227     946     607     450     57     (77 )   2,699  

Ending balance - allowance for loan loss

  $1,100     $1,259     $1,327     $291     $2,978     $21     $191     $7,167  
                                                 

Period-end amount allocated to:

                                               

Loans individually evaluated for impairment

  $647     $486     $740     $-     $670     $-     $-     $2,543  

Loans collectively evaluated for impairment

  453     773     587     291     2,308     21     191     4,624  

Ending balance – allowance for loan loss

  $1,100     $1,259     $1,327     $291     $2,978     $21     $191     $7,167  
                                                 

Ending balance – loans

  $18,538     $59,814     $56,185     $23,799     $32,792     $961     $2,807     $194,896  
                                                 

Loans individually evaluated for impairment

  $2,906     $4,784     $7,541     $-     $15,610     $-     $-     $30,841  

Loans collectively evaluated for impairment

  15,632     55,030     48,644     23,799     17,182     961     2,807     164,055  

Ending balance – loans

  $18,538     $59,814     $56,185     $23,799     $32,792     $961     $2,807     $194,896  

 

Impaired Loans. Impaired loans include loans that are on non-accrual but may also include loans that are performing and paying per the terms of the loan agreement. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on non-accruing impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Interest payments on accruing impaired loans are recognized as interest income. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

 
17

 

 

Impaired loans as of September 30, 2012 are set forth in the following table.

 

   

September 30, 2013 (unaudited)

 

(Dollars in 000’s)

 

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 

With no related allowance:

                             

Commercial

  $11     $28     $-     $97     $-  

Real estate:

              -              

Residential

  3,279     3,852     -     2,661     76  

Commercial

  4,432     4,491     -     4,387     114  

Home Equity

  32     32     -     16     1  

Construction

  12,132     14,101     -     13,157     5  
                               

With an allowance recorded:

                             

Commercial

  $2,460     $2,460     $480     $2,592     $114  

Real estate:

                             

Residential

  1,229     1,252     282     1,985     35  

Commercial

  4,400     4,400     606     3,800     116  

Construction

  1,321     1,354     783     1,375     -  

Installment

  7     7     5     3     23  
                               

Total:

                             

Commercial

  $2,471     $2,488     $480     $2,689     $114  

Real Estate:

                             

Residential

  4,508     5,104     282     4,646     111  

Commercial

  8,832     8,891     606     8,187     230  

  Home Equity

  32     32     -     16     1  

Construction

  13,453     15,455     783     14,532     28  

Installment

  7     7     5     3     -  

Total:

  $29,303     $31,977     $2,156     $30,073     $484  

 

 
18

 

 

Impaired loans as of December 31, 2012 are set forth in the following table.

 

   

December 31, 2012

 

(Dollars in 000’s)

 

Recorded Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded Investment

   

Interest

Income

Recognized

 

With no related allowance:

                             

Commercial

  $182     $198     $-     $1,686     $8  

Real estate:

                             

Residential

  2,043     2,109     -     2,520     94  

Commercial

  4,342     4,443     -     4,557     238  

Construction

  14,182     16,168     -     14,486     215  
                               

With an allowance recorded:

                             

Commercial

  $2,724     $2,724     $647     $2,042     $150  

Real estate:

                             

Residential

  2,741     2,772     486     2,238     46  

Commercial

  3,199     3,199     740     1,990     123  

Construction

  1,428     1,498     670     2,489     63  

Installment

  -     -     -     116     -  
                               

Total:

                             

Commercial

  $2,906     $2,922     $647     $3,728     $158  

Real Estate:

                             

Residential

  4,784     4,881     486     4,758     140  

Commercial

  7,541     7,642     740     6,547     361  

Construction

  15,610     17,666     670     16,975     278  

Installment

  -     -     -     116     -  

Total:

  $30,841     $33,111     $2,543     $32,124     $937  

 

Generally, no additional funds are committed to be advanced in connection with our impaired loans. Impaired loans include loans that are on non-accrual but may also include loans that are performing and paying per the terms of the loan agreement. The Company has identified these loans as impaired because either (1) they are related to construction and development loans where the underlying project is delayed, or (2) the fair value of the collateral supporting the loan may be less than the loan amount even though the loan is current. At the time that the loan becomes ninety days past due, the Company will put the loan on non-accrual.

 

Troubled Debt Restructurings (TDRs): In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). When loans are modified under the terms of a TDR, the Company typically offers the borrower an extension of the loan, maturity date and/or a reduction in the original contractual interest rate.

 

 
19

 

 

 

The number and outstanding recorded investment of loans entered into under the terms of a TDR during the nine months ended September 30, 2013 (unaudited) and the year ended December 31, 2012, by type of concession granted, are set forth in the following table:

 

  (Dollars in 000’s)

September 30, 2013

 

Number of

Contracts

Rate

Modification

Term

Extension

Rate Modification

& Term Extension

Installment

1

$-

$7

$-

Real Estate – Home Equity

1

-

32

-

Real Estate – Commercial

3

-

79

1,472

Real Estate - Construction

1

-

-

189

Total

6

$-

$118

$1,661

 

 

  (Dollars in 000’s)

December 31, 2012

 

Number of

Contracts

Rate

Modification

Term

Extension

Rate Modification

& Term Extension

Commercial

1

$-

$-

$32

Real Estate – Residential

5

-

184

1,156

Real Estate – Commercial

3

-

-

1,754

Real Estate - Construction

7

4,287

538

2,527

Total

16

$4,287

$722

$5,469

 

Troubled debt restructured loans are considered to be in default if the borrower fails to make timely payments under the terms of the restructure and repayment possibilities have been exhausted. There were no troubled debt restructurings that defaulted within one year during the year ended December 31, 2012 whereby all repayment possibilities had been exhausted. The table below shows troubled debt restructurings that defaulted within one year of modification during the nine months ended September 30, 2013 (unaudited):

 

  (Dollars in 000’s)

September 30, 2013

 

Number of

Contracts

Recorded

Investment

Real Estate – Residential

1

$16

Real Estate - Construction

1

342

Total

2

$358

 

As of September 30, 2013 loans classified as troubled debt restructurings and included in impaired loans totaled $18.1 million. At September 30, 2013, $9.7 million of the loans classified as troubled debt restructurings are in compliance with the modified terms, and $1.8 million have paid per the terms of the restructuring; however, they remain on non-accrual.    

 

As of December 31, 2012, loans classified as troubled debt restructurings and included as impaired loans totaled $19.0 million. At December 31, 2011, $8.8 million of the loans classified as troubled debt restructurings are in compliance with the modified terms, and $2.4 million have paid per the terms of the restructuring; however, they remain on non-accrual.

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

 
20

 

 

 

The following is a table which includes an aging analysis of the recorded investment of past due loans as of September 30, 2013 (unaudited).

 

  (Dollars in 000’s)

30-59

Days Past

Due

60-89

Days Past

Due

 

90 Days

or More

Past Due

 

 

Total

Past Due

 

 

 

Current

 

 

 

Total

Loans

 

90 Days

Past Due and

Still Accruing

 

 

Non-

Accruals

Commercial

$51

$130

$-

$181

$14,145

$14,326

$-

$1,381

Real estate:

               

Residential

1,309

1,163

1,970

4,442

46,016

50,458

-

3,818

 Commercial

1,080

206

165

1,451

51,532

52,983

-

3,369

 Home equity

175

373

14

562

21,077

21,639

-

168

 Construction

1,610

287

11,323

13,220

15,519

28,739

-

12,155

Bank cards

1

3

-

4

882

886

-

-

Installment

36

12

12

60

2,453

2,513

-

43

 Total

$4,262

$2,174

$13,484

$19,920

$151,624

$171,544

$-

$20,934

 

The following is a table which includes an aging analysis of the recorded investment of past due loans as of December 31, 2012.

 

  (Dollars in 000’s)

30-59

Days Past

Due

60-89

Days Past

Due

 

 

90 Days

or More

Past Due

 

 

 

Total

Past Due

 

 

 

 

Current

 

 

 

 

Total

Loans

 

90 Days

Past Due and

Still Accruing

 

 

 

Non-

Accruals

Commercial

$132

$-

$17

$149

$18,389

$18,538

$-

$2,156

Real estate:

               

Residential

2,376

1,847

750

4,973

54,841

59,814

-

3,933

Commercial

768

570

981

2,319

53,866

56,185

-

3,295

Home equity

287

336

-

623

23,176

23,799

-

143

Construction

2,509

704

11,526

14,739

18,053

32,792

-

13,048

Bank cards

6

17

26

49

912

961

26

-

Installment

52

29

26

107

2,700

2,807

5

54

 Total

$6,130

$3,503

$13,326

$22,959

$171,937

$194,896

$31

$22,629

 

 
21

 

 

Note 4. FHLB and Other Borrowings

 

The borrowings from the Federal Home Loan Bank of Atlanta, Georgia (“FHLB”), are secured by qualifying residential and commercial first mortgage loans, qualifying home equity loans and certain specific investment securities. The Company, through its principal subsidiary, Central Virginia Bank, has available unused borrowing capacity from the Federal Home Loan Bank totaling $14.3 million. The borrowings at September 30, 2013 and December 31, 2012, consist of the following and had a weighted-average interest rate of 3.60%:

             

(Dollars in 000’s)

 

September 30,

2013

(Unaudited)

   

December 31,

2012

 

Fixed rate borrowings with interest rates ranging from 2.99% to 4.57% (1)

  $40,000     $40,000  

 

 

(1)

Interest on fixed rate FHLB borrowings are due quarterly with principal due and payable periodically from March 17, 2014 to July 24, 2017.

 

The contractual maturities of our FHLB advances as of September 30, 2013 are as follows:

       

(Dollars in 000’s)

 

September 30,

2013

(Unaudited)

 

Due in 2014

  $25,000  

Due in 2015

  -  

Due in 2016

  10,000  

Due in 2017

  5,000  

Due in 2018

  -  

Thereafter

  -  
    $40,000  

 

Borrowing facilities: The Company has entered into various borrowing arrangements with other financial institutions for federal funds and other borrowings. The total amount of borrowing facilities available as of September 30, 2013 total $124.3 million, of which $84.3 million was available to borrow. The total amount of borrowing facilities at December 31, 2012, was approximately $124.7 million with $84.7 million available to borrow.

 

Note 5. Stock-Based Compensation

 

Stock Options: The Company has a Stock Plan that provides for the grant of Incentive Stock Options up to a maximum of 341,196 shares of common stock of which 162,958 shares have not been issued. This Plan was adopted to foster and promote our long-term growth and financial success by assisting in recruiting and retaining directors and key employees by enabling individuals who contribute significantly to participate in our future success and to align their interests with ours. The options were granted at the market value on the date of each grant. The maximum term of the options is ten years. The Company has not issued new options, and no expense has been recognized, since 2007.

 

 
22

 

 

The following table presents a summary of our options under the Plan at September 30, 2013 (unaudited):

 

 

Number

of

Shares

Weighted

Average

Exercise Price

Aggregate

Intrinsic

Value (1)

Outstanding at December 31, 2012

6,454

$21.44

$-

     Granted

-

-

-

     Exercised

-

-

-

     Canceled or expired

(6,454)

$21.44

-

Options outstanding, September 30, 2013

-

$-

$-

Options exercisable, September 30, 2013

-

$-

$-

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2013. This amount changes based on changes in the market value of our common stock.

 

Restricted Stock: During the first quarter of 2011, the Company granted 48,439 restricted stock under the Company’s Stock Incentive Plan to the Company’s Officers. The restricted stock vested over a three year period from the date of grant. All grantees of these restricted stock awards were entitled to receive all dividends and distributions (also known as “dividend equivalent rights”) paid with respect to the common shares of the Company underlying such restricted stock at the time such dividends or distributions were paid to holders of common shares.

 

The Company recognizes compensation expense for outstanding restricted stock over their vesting periods for an amount equal to the fair value of the restricted stock at grant date. Fair value is determined by the price of the common shares underlying the restricted stock on the grant date. As of September 30, 2013, there was no unrecognized compensation cost related to non-vested restricted stock granted under the Stock Plan. The Company recorded $23 thousand of income related to restricted stock during the nine months ended September 30, 2013 due to forfeitures.

 

A summary of the changes in non-vested restricted stock during the nine months ended September 30, 2013 (unaudited), is presented below:

 

   

Number Of

Restricted Stock

   

Weighted

Average Grant-

Date Fair Value

 

Non-vested at January 1, 2013

  30,643     $ 1.73  

Granted

  -     -  

Vested

  (11,203 )   1.73  

Forfeited

  (19,440 )   1.73  

Non-vested at September 30, 2013

  -     $ -  

 

Note 6. Fair Value Measurements

 

As required by FASB ASC Topic 820, the Company must record fair value adjustments to certain assets and liabilities required to be measured at fair value and to determine fair value disclosures. Topic 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

 
23

 

 

 

ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

 

Level 1:

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

 

Level 2:

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

 

Level 3:

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

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

 

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or substantially similar securities by using pricing models that consider observable market data (Level 2). The Company uses an independent valuation firm that specializes in valuing debt securities (Level 3).  The independent firm evaluates all relevant credit and structural aspects of each debt security, determining appropriate performance assumptions and performing discounted cash flow analysis.  The following topics are covered in their evaluation:

 

 

Detailed credit and structural evaluation for each piece of collateral in the debt security;

 

Collateral performance projections for each piece of collateral in the debt security;

 

Terms of the debt security structure; and

 

Discounted cash flow modeling.

 

 
24

 

 

 

The following tables present the balances of our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 (unaudited) and December 31, 2012:

 

(Dollars in 000’s)

       

Fair Value Measurements at September 30, 2013 Using

 

Description

 

Balance as of

September 30,

2013

   

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

   

Significant

Other Observable

Inputs (Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 

U.S. Treasury securities

  $1,848     $ 1,848     $-     $ -  

U.S. government agencies and corporations

  30,729     23,339     7,390     -  

Bank eligible preferred and equities

  2,002     2,002     -     -  

Mortgage-backed securities

  69,109     20,488     48,621     -  

Corporate and other debt

  7,427     7,427     -     -  

States and political subdivisions

  8,801     2,761     6,040     -  

 

 

(Dollars in 000’s)

       

Fair Value Measurements at December 31, 2012 Using

 

Description

 

Balance as of

December 31,

2012

   

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

   

Significant

Other Observable

Inputs (Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 

U.S. Treasury securities

  $7,169     $ -     $7,169     $ -  

U.S. government agencies and corporations

  59,535     -     59,535     -  

Bank eligible preferred and equities

  2,140     -     2,140     -  

Mortgage-backed securities

  59,795     -     59,795     -  

Corporate and other debt

  6,548     -     4,318     2,230  

States and political subdivisions

  10,491     -     10,491     -  

 

The table below presents reconciliation and statement of operations classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013 (unaudited):

 

(Dollars in 000’s)

 

Available for

Sale Securities

 

Balance, December 31, 2012

  $ 2,230  

Total realized and unrealized gains (losses):

     

Included in earnings

  -  

Included in other comprehensive income

  -  

Purchases, sales, issuances and settlements, net

  -  

Transfers in (out) of Level 3

  (2,230 )

Balance, September 30, 2013

  $-  

 

 

 
25

 

 

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

 

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

 

Other real estate owned: Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, (Level 2) valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in net expenses from foreclosed assets. Level 2 or Level 3 for other real estate owned is determined in a manner similar to that described below for impaired loans.

 

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The fair value of real estate collateral is considered Level 2 if it is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data. Additionally, fair value of a loan is Level 2 if the value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Fair value of real estate collateral is considered Level 3 if the collateral is a house or building in the process of construction; if the appraised value is discounted or uses an income approach; or if an internal valuation using current market data is considered. Likewise, discounted cash flows of a business’s operations or values for inventory and accounts receivables collateral that are based on financial statement balances or aging reports are considered Level 3. Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

 

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

 

(Dollars in 000’s)

       

Fair Value Measurements at September 30, 2013 (unaudited) Using

 

Description

 

Balance

as of

September 30,

2013

   

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Impaired loans, net of valuation allowance

  $7,261     $ -     $-     $7,261  

Other real estate owned

  $895     $ -     $ -     $895  

 

 
26

 

 

(Dollars in 000’s)

       

Fair Value Measurements at December 31, 2012 Using

 

Description

 

Balance

as of

December 31,

2012

   

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Impaired loans net of valuation allowance

  $ 7,549     $ -     $ -     $ 7,549  

Other real estate owned

  $ 4,793     $ -     $ -     $ 4,793  

 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2013 (unaudited):

 

(Dollars in 000’s)

 

Quantitative Information about Level 3 Fair Value Measurements for

September 30, 2013

Description

Fair

Value

 

Valuation Technique

 

Unobservable Input

Range

(Weighted

Average)

Impaired loans – real estate:

           

Impaired loans – real estate construction

$320

 

Discounted appraised value

 

Selling cost

10% (10%)

Impaired loans – real estate residential

$948

 

Discounted appraised value

 

Selling cost

5% - 12% (7%)

Impaired loans – real estate commercial

$684

 

Discounted appraised value

 

Selling cost

10% (10%)

Impaired loans – real estate construction

$218

 

Internal valuation

 

(1)

 

Impaired loans – real estate commercial

$655

 

Internal valuation

 

(1)

 

Impaired loans – real estate commercial

$2,455

 

Discounted cash flow

 

Discount rate

5.3% - 6.9% (6%)

Impaired loans – commercial:

           

Impaired loans – commercial

$211

 

Internal valuation

 

(1)

 

Impaired loans – commercial

$1,769

 

Discounted cash flow

 

Discount rate

7.2% - 7.9% (7%)

Impaired loans – installment:

$1

 

Internal valuation

 

(1)

 

Other real estate owned

$895

 

Discounted appraised value

 

Discount for lack of marketability

12% - 35% (18%)

(1) Internal valuations unobservable inputs are not available as the estimates of fair value are based on data such as tax assessments, internal estimates on sale of equipment of property by third party vendors, and financial support of the loans by the guarantors. Loans that are valued based on tax assessments may contain a discount related to the cost of sale ranging from 5%-10%. In some instances, loans may also contain a discount for lack of marketability of 1-16%.

 

ASC 820-10-50 “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

 

The following methods and assumptions were used by the Company and subsidiary in estimating the fair value of financial instruments:

 

 
27

 

 

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.

 

Investment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable or substantially similar instruments.

 

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

 

Accrued interest receivable and accrued interest payable: The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values.

 

Deposit liabilities: The fair values of demand deposits equal their carrying amounts which represents the amount payable on demand. The carrying amounts for variable-rate fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected maturities on time deposits.

 

Federal funds purchased and securities sold under repurchase agreements: The carrying amounts for federal funds purchased and securities sold under repurchase agreements approximate their fair values.

 

FHLB borrowings: The fair value of FHLB borrowings is estimated by discounting its future cash flows using net rates offered for similar borrowings.

 

Capital trust preferred securities: The fair values for capital trust preferred securities are determined using estimated future cash flows, discounted at the interest rates currently being offered on similar products. In that regard, together with other factors related to current market conditions, the derived fair value estimates cannot be substantiated by comparison to independent markets and may not be realized in an immediate settlement of the securities. 

 

 
28

 

 

 

The following is a summary of the carrying amounts and estimated fair values of our financial assets and liabilities at September 30, 2013 (unaudited) and December 31, 2012:

 

 

Fair Value Measurements at September 30, 2013 using

Dollars in 000’s

Carrying

Value

Quoted

Prices in

Active Markets

for Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Balance

           

Financial assets:

         

Cash and due from banks

$9,642 $9,642 $- $- $9,642

Federal funds sold

50,133 50,133 - - 50,133

Securities available for sale

119,916 57,865 62,051 - 119,916

Loans, net

164,814     163,895 163,895

Accrued interest receivable

1,020 - 1,020 - 1,020

Bank owned life insurance

11,263 - 11,263 - 11,263
           

Financial liabilities:

         

Demand and variable rate deposits

187,879 - 187,879 - 187,879

Certificates of deposit

125,832 - - 126,506 126,506

FHLB borrowings

40,000 - 42,085 - 42,085

Capital trust preferred securities

5,155 - - 4,439 4,439

Accrued interest payable

911 - 911 - 911

 

 
29

 

 

 

Fair Value Measurements at December 31, 2012 using

 

 

 

 

Dollars in 000’s

 

 

 

 Carrying

Value

Quoted

Prices in

Active Markets

for Identical

Asset

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

 

 Significant

Unobservable

Inputs

(Level 3)

 

 

 

 

Balance

           

Financial assets:

         

Cash and due from banks

$8,341

$8,341

$-

$-

$8,341

Federal funds sold

13,831

13,831

-

-

13,831

Securities available for sale

145,678

-

143,448

2,230

145,678

Securities held to maturity

1,355

-

1,355

-

1,355

Loans, net

187,501

 

-

187,114

187,114

Accrued interest receivable

1,435

-

1,435

-

1,435

Bank owned life insurance

10,996

-

10,996

-

10,996

           

Financial liabilities:

         

Demand and variable rate deposits

186,860

-

186,860

-

186,860

Certificates of deposit

137,075

-

-

138,797

138,797

FHLB borrowings

40,000

-

43,137

-

43,137

Capital trust preferred Securities

5,155

-

-

2,040

2,040

Accrued interest payable

796

-

796

-

796

 

At September 30, 2013 and December 31, 2012, the Company had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed, and, therefore, they were deemed to have an immaterial affect on the current fair market value.

 

Note 7. Income Taxes

 

The Company incurred a net loss of $1.7 million and $2.4 million for the three and nine months ended September 30, 2013, respectively. The Company incurred net income of $185 thousand and $694 thousand for the three and nine months ended September 30, 2012, respectively. The Company had no income tax expense for the three and nine months 2013 and 2012. Due to significant losses, the Company was unable to ascertain it would generate sufficient net income in the near term to realize its net deferred tax assets, and therefore, established a 100% deferred tax valuation allowance during 2010.

 

 
30

 

 

Note 8. Other Operating Expenses

 

The following table summarizes the details of other operating expenses for the three and nine months ended September 30, 2013 and 2012:

 

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

(Dollars in 000’s)

2013

2012

2013

2012

Advertising and public relations

$ 8

$12

$48

$39

Taxes and licenses

17

19

52

61

Legal and professional fees

139

113

325

342

Consulting fees

165

99

459

319

Outsourced data processing fees

262

135

551

416

Merger expenses

219

-

497

-

Other

989

614

2,129

1,745

Total other operating expenses

$1,799 

$992 

$4,061

$2,922 

 

Note 9. Deferral of Dividends on Preferred Stock and Deferral of Interest on Capital Trust Preferred Securities

 

On February 12, 2010, the Company notified the U.S. Department of the Treasury that the Board of Directors of the Company determined that the payment of the quarterly cash dividend of $142 thousand due during the first quarter of 2010, and subsequent quarterly payments on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, should be deferred. The total arrearage on such preferred stock, including interest on the unpaid dividends as of September 30, 2013 was approximately $2.3 million.

 

On March 4, 2010 the Company notified U.S. Bank, National Association that pursuant to Section 2.11 of the Indenture dated December 17, 2003 among Central Virginia Bankshares, Inc. as Issuer and U.S. Bank, National Association, as Trustee for the $5,155,000 Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033, (CUSIP 155793AA0), the Board of Directors of Central Virginia Bankshares, Inc. determined to defer the regular quarterly Interest Payments on such Debentures, beginning March 31, 2010. As of September 30, 2013 the total arrearage on such interest payments is $665 thousand and is included in accrued interest payable in the consolidated financial statements.

 

Note 10. Regulatory Matters

 

Over the past six years, the Company’s capital position has been negatively impacted by deteriorating economic conditions that in turn caused losses in its investment and loan portfolios. As a result of a 2009 examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, the Company entered into a written agreement with the Bureau of Financial Institutions and the Federal Reserve. The written agreement requires the Company to develop a plan to significantly exceed the capital level required to be classified as “well capitalized.” It also provides that the Company shall:

 

 

submit written plans to the Bureau of Financial Institutions and the Federal Reserve to strengthen corporate governance and board and management structure;

 

 

strengthen board oversight of the management and operations of the Company;

 

 

strengthen credit risk management and administration;

 

 

establish ongoing independent review and grading of the Company’s loan portfolio; enhance internal audit processes;

 

 

improve asset quality;

 

 
31

 

 

 

review and revise our methodology for determining the allowance for loan and lease losses (“ALLL”) and maintain an adequate ALLL;

 

 

maintain sufficient capital;

 

 

establish a revised contingency funding plan;

 

 

establish a revised investment policy; and

 

 

improve the Company’s earnings and overall condition.  

 

The written agreement also restricts the payment of dividends and any payments on trust preferred securities or subordinated debt, and any reduction in capital or the purchase or redemption of stock without the prior approval of the Bureau of Financial Institutions and the Federal Reserve.

 

The Company has submitted plans to significantly exceed the capital level required to be classified as “well capitalized”, improve corporate governance, strengthen board oversight of management and operations, strengthen credit risk management and administration, and improve asset quality. The Company continues to address the requirements of the written agreement, and with the recent acquisition of the Company by C&F Financial Corporation as described in Note 11-Subsequent Event, the Company is in compliance with all requirements of the written agreement.

 

Note 11. Subsequent Event

 

On October 1, 2013, C&F Financial Corporation completed the previously announced acquisition of Central Virginia Bankshares, Inc. Pursuant to the Agreement and Plan of Merger dated June 10, 2013, our shareholders received $0.32 for each share of CVB common stock they owned, or approximately $846 thousand in the aggregate. In addition, C&F Financial Corporation purchased from the U.S. Treasury for $3.35 million all of our preferred stock and warrants issued to the U.S. Treasury under the Capital Purchase Program, including accrued and unpaid dividends on the preferred stock.

 

 

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