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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2015

or

 

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

For the transition period from                      to                     

Commission file number: 000-53380

 

 

Xenith Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   80-0229922

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One James Center

901 E. Cary Street, Suite 1700

Richmond, Virginia

  23219
(Address of principal executive offices)   (Zip Code)

(804) 433-2200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

The number of shares of Common Stock, par value $1.00 per share, outstanding at May 1, 2015 was 12,990,256.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I - FINANCIAL INFORMATION   
Item 1 Financial Statements      1   
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
Item 3 Quantitative and Qualitative Disclosures About Market Risk      53   
Item 4 Controls and Procedures      53   
PART II - OTHER INFORMATION   
Item 1 Legal Proceedings      54   
Item 1A Risk Factors      54   
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds      54   
Item 6 Exhibits      54   
SIGNATURES   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2015 AND DECEMBER 31, 2014

 

     (Unaudited)        
(in thousands, except share data)    March 31, 2015     December 31, 2014  

Assets

    

Cash and cash equivalents

    

Cash and due from banks

   $ 44,072     $ 34,666  

Federal funds sold

     53,200       4,533  
  

 

 

   

 

 

 

Total cash and cash equivalents

  97,272     39,199  

Securities available for sale, at fair value

  72,998     64,341  

Securities held to maturity, at amortized cost (fair value: 2015 - $9,893; 2014 - $9,683)

  9,276     9,279  

Loans, net of allowance for loan and lease losses, 2015 - $6,443; 2014 - $6,247

  750,957     744,626  

Premises and equipment, net

  7,943     8,010  

Other real estate owned, net

  1,145     1,140  

Goodwill and other intangible assets, net

  16,029     16,143  

Accrued interest receivable

  3,983     3,498  

Deferred tax asset

  6,582     6,343  

Bank owned life insurance

  14,204     14,106  

Other assets

  12,348     11,367  
  

 

 

   

 

 

 

Total assets

$ 992,737   $ 918,052  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

Deposits

Demand and money market

$ 500,609   $ 465,253  

Savings

  10,181     10,108  

Time

  332,609     297,550  
  

 

 

   

 

 

 

Total deposits

  843,399     772,911  

Accrued interest payable

  278     276  

Federal funds purchased and borrowed funds

  31,925     32,000  

Supplemental executive retirement plan

  2,291     2,295  

Other liabilities

  7,748     4,349  
  

 

 

   

 

 

 

Total liabilities

  885,641     811,831  
  

 

 

   

 

 

 

Shareholders’ equity

Preferred stock, $1.00 par value, $1,000 liquidation value, 25,000,000 shares authorized as of March 31, 2015 and December 31, 2014; 8,381 shares issued and outstanding as of March 31, 2015 and December 31, 2014

  8,381     8,381  

Common stock, $1.00 par value, 100,000,000 shares authorized as of March 31, 2015 and December 31, 2014; 12,990,256 shares issued and outstanding as of March 31, 2015 and 12,929,834 shares issued and outstanding as of December 31, 2014

  12,990     12,930  

Additional paid-in capital

  86,149     86,016  

Retained earnings (accumulated deficit)

  340     (560

Accumulated other comprehensive loss, net of tax

  (764   (546
  

 

 

   

 

 

 

Total shareholders’ equity

  107,096     106,221  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

$ 992,737   $ 918,052  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

1


Table of Contents

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

 

(in thousands, except per share data)    March 31, 2015     March 31, 2014  

Interest income

    

Interest and fees on loans

   $ 8,206     $ 5,894  

Interest on securities

     446       371  

Interest on federal funds sold and deposits in other banks

     86       66  
  

 

 

   

 

 

 

Total interest income

  8,738     6,331  
  

 

 

   

 

 

 

Interest expense

Interest on deposits

  828     478  

Interest on time certificates of $100,000 and over

  438     289  

Interest on federal funds purchased and borrowed funds

  210     100  
  

 

 

   

 

 

 

Total interest expense

  1,476     867  
  

 

 

   

 

 

 

Net interest income

  7,262     5,464  

Provision for loan and lease losses

  565     227  
  

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

  6,697     5,237  
  

 

 

   

 

 

 

Noninterest income

Service charges on deposit accounts

  163     134  

Net loss on sale and write-down of other real estate owned

  —        (38

Gain on sales of securities

  67     —     

Increase in cash surrender value of bank owned life insurance

  97     83  

Other

  85     141  
  

 

 

   

 

 

 

Total noninterest income

  412     320  
  

 

 

   

 

 

 

Noninterest expense

Compensation and benefits

  3,282     2,823  

Occupancy

  418     353  

FDIC insurance

  177     115  

Bank franchise taxes

  246     191  

Technology and data processing

  535     404  

Communications

  102     77  

Insurance

  93     72  

Professional fees

  275     417  

Amortization of intangible assets

  114     91  

Guaranteed student loan servicing

  123     156  

Other

  447     394  
  

 

 

   

 

 

 

Total noninterest expense

  5,812     5,093  
  

 

 

   

 

 

 

Income before income tax expense

  1,297     464  

Income tax expense

  376     209  
  

 

 

   

 

 

 

Net income

  921     255  
  

 

 

   

 

 

 

Preferred stock dividend

  (21   (21
  

 

 

   

 

 

 

Net income available to common shareholders

$ 900   $ 234  
  

 

 

   

 

 

 

Earnings per common share (basic and diluted):

$ 0.07   $ 0.02  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

2


Table of Contents

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

 

(in thousands)    March 31, 2015     March 31, 2014  

Net income

   $ 921     $ 255  

Other comprehensive (loss) income, before taxes:

    

Securities available for sale:

    

Unrealized (loss) gain arising during the year

     (9     1,696  

Reclassification adjustment for gains included in net income

     (67     —     
  

 

 

   

 

 

 

Unrealized (loss) gain on available-for-sale securities

  (76   1,696  
  

 

 

   

 

 

 

Securities held to maturity:

Unrealized loss transferred to held to maturity

  —        (518

Amortization of unrealized loss transferred from available for sale

  14     8  
  

 

 

   

 

 

 

Changes in held-to-maturity securities

  14     (510
  

 

 

   

 

 

 

Unrealized loss on derivative:

Unrealized loss arising during the year

  (303   (64

Reclassification adjustment for losses included in net income

  35     36  
  

 

 

   

 

 

 

Unrealized loss on derivative

  (268   (28
  

 

 

   

 

 

 

Other comprehensive (loss) income, before taxes

  (330   1,158  
  

 

 

   

 

 

 

Income tax benefit (expense) related to other comprehensive income (loss)

  112     (394
  

 

 

   

 

 

 

Comprehensive income

$ 703   $ 1,019  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Unaudited)

 

(in thousands)    March 31, 2015     March 31, 2014  

Cash flows from operating activities

    

Net income

   $ 921     $ 255  

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

    

Provision for loan and lease losses

     565       227  

Depreciation and amortization

     298       263  

Net amortization of securities

     201       100  

Accretion of acquisition accounting adjustments

     (502     (139

Deferred tax benefit

     (127     (225

Gain on sales of securities

     (67     —     

Share-based compensation expense

     186       328  

Net loss on sale and write-down of other real estate owned

     —          38  

Increase in cash surrender value of bank owned life insurance

     (97     (83

Change in operating assets and liabilities:

    

Accrued interest receivable

     (485     (346

Other assets

     (852     (924

Accrued interest payable

     3       11  

Other liabilities

     3,127       372  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  3,171     (123
  

 

 

   

 

 

 

Cash flows from investing activities

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

  5,076     2,335  

Purchases of available-for-sale securities

  (13,927   —     

Net increase in loans

  (6,413   (22,168

Net increase in cost of other real estate owned

  (5   —     

Net purchase of premises and equipment

  (117   (33

Purchase of FRB and FHLB stock

  (129   (124
  

 

 

   

 

 

 

Net cash used in investing activities

  (15,515   (19,990
  

 

 

   

 

 

 

Cash flows from financing activities

Net increase (decrease) in demand and savings deposits

  35,429     (9,496

Net increase in time deposits

  35,078     10,249  

Net (decrease) increase in federal funds purchased and borrowed funds

  (75   1,423  

Issuance of common stock, net of issuance costs

  6     20  

Repurchase of common stock

  —        (265

Preferred stock dividend

  (21   (21
  

 

 

   

 

 

 

Net cash provided by financing activities

  70,417     1,910  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  58,073     (18,203

Cash and cash equivalents

Beginning of period

  39,199     30,693  
  

 

 

   

 

 

 

End of period

$ 97,272   $ 12,490  
  

 

 

   

 

 

 

Supplementary disclosure of cash flow information

Cash payments for:

Interest

$ 1,492   $ 856  
  

 

 

   

 

 

 

Income taxes

$ 300   $ —     
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

March 31, 2015

 

 

Note 1. Organization

Xenith Bankshares, Inc. (“Xenith Bankshares” or the “company”) is the bank holding company for Xenith Bank (the “Bank”), a Virginia-based institution headquartered in Richmond, Virginia. As of March 31, 2015, the company, through the Bank, operates eight full-service branches: one branch in Tysons Corner, Virginia, two branches in Richmond, Virginia, three branches in Suffolk, Virginia, and two branches in Gloucester, Virginia. Additionally, the Bank operates one loan production office in York County, Virginia.

In December 2009, First Bankshares, Inc. (“First Bankshares”), the bank holding company for SuffolkFirst Bank, and Xenith Corporation completed the merger of Xenith Corporation with and into First Bankshares (the “First Bankshares Merger”), with First Bankshares being the surviving entity in the First Bankshares Merger. At the effective time of the First Bankshares Merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the First Bankshares Merger, SuffolkFirst Bank changed its name to Xenith Bank. Although the First Bankshares Merger was structured as a merger of Xenith Corporation with and into First Bankshares, with First Bankshares being the surviving entity for legal purposes, Xenith Corporation was treated as the acquirer for accounting purposes.

Effective on July 29, 2011, the Bank completed the acquisition of select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office of Paragon Commercial Bank, a North Carolina banking corporation, and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office (the “Paragon Transaction”).

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (the “FDIC”) acted as receiver of VBB. The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Acquisition agreement, the Bank received a discount of $23.8 million on the net assets and did not pay a deposit premium. The VBB Acquisition was completed without any shared-loss agreement with the FDIC.

On June 30, 2014, the company completed the merger of Colonial Virginia Bank (“CVB”) with and into the Bank, with the Bank being the surviving bank (the “CVB Acquisition”). At the effective time of the CVB Acquisition, each share of CVB common stock outstanding immediately prior to the effective time of the CVB Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock.

Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. Based on the Exchange Ratio, an aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Pursuant to the CVB Acquisition, the company acquired approximately $114.4 million of assets, including approximately $70.1 million in loans and assumed approximately $103.9 million in liabilities, including approximately $101.0 million of deposits. Such amounts include preliminary estimated fair value adjustments, which are subject to change. CVB operated two full-services branches in Gloucester, Virginia, and one loan production office in York County, Virginia. The CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time.

In September 2014, the company issued and sold an aggregate of 880,000 shares of its common stock, $1.00 par value per share, at a price of $6.35 per share to third-party investors for an aggregate purchase price, net of stock issuance costs, of approximately $5.6 million.

 

5


Table of Contents

Note 2. Basis of Presentation

The consolidated financial statements include the accounts of Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank. All significant intercompany accounts have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim period reporting, and reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial position at March 31, 2015, the results of operations and comprehensive income for the three months ended March 31, 2015 and 2014, and the statements of cash flows for the three months ended March 31, 2015 and 2014. The results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015. The unaudited consolidated financial statements and accompanying notes should be read in conjunction with the company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2014.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Revision of Financial Statements

During the second quarter of 2014, the company determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment on the company’s consolidated balance sheets. Prior to the second quarter of 2014, these loans were classified as loans held for sale. All prior periods presented have been revised to reflect this classification. The reclassification in prior periods does not affect reported earnings, total loans, total assets or total shareholders’ equity. The reclassification does affect amounts previously reported as cash flows used in operating activities and cash flows used in investing activities, as purchases and sales of loans held for sale are reported as cash flows from operating activities, whereas increases and decreases in loans held for investment are reported as cash flows from investing activities. Management has evaluated the effect of the incorrect presentation in prior periods and has concluded that previously issued financial statements were not materially misstated.

The effect of the revision on the line items within the company’s consolidated statements of cash flows for the period ended March 31, 2015 is as follows:

 

     March 31, 2014  
     As Reported      Revisions      As Revised  

Change in operating assets and liabilities:

        

Originations of loans held for sale

   $ (12,057    $ 12,057       $ —     

Proceeds from sales of loans held for sale

     9,085         (9,085      —     

Net cash used in operating activities

     (3,095      2,972         (123

Cash flows from investing activities:

        

Net increase in loans held for investment

   $ (19,196    $ (2,972    $ (22,168

Net cash used in investing activities

     (17,018      (2,972      (19,990

Note 3. Business Combination

The company has accounted for the CVB Acquisition under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates were based on management’s assessment of the best information available and are preliminary and subject to change.

In accordance with the framework established by FASB ASC Topic 820, “Fair Value Measurements and Disclosure” (“ASC 820”), the company used a fair value hierarchy to prioritize the information used to form assumptions and estimates in determining fair values. These fair value hierarchies are further discussed in Note 16 – Fair Value Measurements.

 

6


Table of Contents

The following table presents the preliminary allocation of the consideration paid to the acquired assets and assumed liabilities in the CVB Acquisition as of the acquisition date. The preliminary allocation resulted in a bargain purchase gain of $42 thousand.

 

Fair value of assets acquired:

  

Cash and cash equivalents

$ 12,560   

Securities available for sale

  17,439   

Loans

  70,051   

Premises and equipment

  3,338   

Other real estate owned

  1,186   

Core deposit intangible

  930   

Accrued interest receivable

  318   

Deferred tax asset

  1,898   

Bank owned life insurance

  4,054   

Other assets

  2,658   
  

 

 

 

Total assets

$ 114,432   
  

 

 

 

Fair value of liabilities assumed:

Deposits

$ 100,985   

Accrued interest payable

  39   

Supplemental executive retirement plan

  2,277   

Other liabilities

  599   
  

 

 

 

Total liabilities

$ 103,900   
  

 

 

 

Net identifiable assets acquired

$ 10,532   

Consideration paid:

Company’s common shares issued

  1,618,186   

Purchase price per share (1)

$ 6.40   
  

 

 

 

Value of common stock issued

  10,356   

Estimated fair value of stock options

  133   

Cash in lieu of fractional shares

  1   
  

 

 

 

Total consideration paid

$ 10,490   
  

 

 

 

Bargain purchase gain

$ 42   
  

 

 

 

 

(1) The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

The following table presents the purchased performing and purchased impaired loans receivable at the date of the CVB Acquisition and the fair value adjustment recorded immediately following the acquisition:

 

     Purchased Performing      Purchased Impaired      Total  

Contractual principal payments receivable

   $ 68,523       $ 4,575       $ 73,098   

Fair value adjustment - credit and interest

     (1,983      (1,064      (3,047
  

 

 

    

 

 

    

 

 

 

Fair value of acquired loans

$ 66,540    $ 3,511    $ 70,051   
  

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

The following table presents the effect of the CVB Acquisition on the company as if the merger had occurred at the beginning of the three-month period ended March 31, 2014, on a pro forma basis. Merger-related costs of $205 thousand for the three months ended March 31, 2014, which are included in the company’s consolidated statements of income, are not included in the pro forma information below. CVB’s merger-related costs of $137 thousand for the three months ended March 31, 2014 that were incurred prior to the completion of the CVB Acquisition are not included in the company’s consolidated statements of income, and are also not included in the pro forma information below. Net income includes pro forma adjustments for the amortization of core deposit intangibles. An effective income tax rate of 34% was used in determining pro forma net income.

 

     Three Months Ended March 31, 2014  

Revenue (net interest income plus noninterest income)

   $ 6,962   

Net income

   $ 573   

Earnings per common share (basic and diluted)

   $ 0.05   

Note 4. Restrictions of Cash

To comply with regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement based on the weeks closest to March 31, 2015 and December 31, 2014 was $8.6 million and $9.4 million, respectively.

Note 5. Securities

The following tables present the amortized cost and fair value of securities as of the dates stated:

 

     March 31, 2015  
            Gross Unrealized         
     Amortized Cost      Gains      (Losses)      Fair Value  

Securities available for sale:

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,114       $ 140       $ (53    $ 11,201   

Municipals - fixed rate

           

- Tax exempt

     46,545         173         (348      46,370   

- Taxable

     3,862         8         —           3,870   

Collateralized mortgage obligations - fixed rate

     11,508         101         (52      11,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

  73,029      422      (453   72,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

Municipals - fixed rate

- Taxable

  9,276      617      —        9,893   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

  9,276      617      —        9,893   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

$ 82,305    $ 1,039    $ (453 $ 82,891   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8


Table of Contents
     December 31, 2014  
            Gross Unrealized         
     Amortized Cost      Gains      (Losses)      Fair Value  

Securities available for sale:

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,513       $ 131       $ (101    $ 11,543   

- Variable rate

     4,136         106         (3      4,239   

Municipals - fixed rate

           

- Tax exempt

     37,825         87         (165      37,747   

- Taxable

     847         1         —           848   

Collateralized mortgage obligations - fixed rate

     9,974         55         (65      9,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

  64,295      380      (334   64,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

Municipals - fixed rate

- Taxable

  9,279      404      —        9,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

  9,279      404      —        9,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

$ 73,574    $    784    $ (334 $ 74,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2015 and December 31, 2014, the company had securities with a fair value of $8.5 million and $8.7 million, respectively, pledged as collateral for public deposits.

The following table presents the amortized cost and fair value of securities by contractual maturity as of the date stated:

 

     March 31, 2015  
     Available for Sale      Held to Maturity  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due within one year

   $ 302       $ 302       $ —         $ —     

Due after one year through five years

     844         851         —           —     

Due after five years through ten years

     9,133         9,222         8,334         8,868   

Due after ten years

     62,750         62,623         942         1,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

$ 73,029    $ 72,998    $ 9,276    $ 9,893   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present fair values and the related unrealized losses in the company’s securities portfolio, with the information aggregated by investment category and by the length of time that individual securities have been in continuous unrealized loss positions as of the dates stated. The number of loss securities in each category is also noted.

 

     March 31, 2015  
            Less than 12 months     More than 12 months     Total  
     Number      Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Securities available for sale:

                  

Mortgage-backed securities

                  

- Fixed rate

     3       $ 6,372       $ (17   $ 2,106       $ (36   $ 8,478       $ (53

Municipals - fixed rate

                  

-Tax exempt

     23         35,997         (348     —           —          35,997         (348

Collateralized mortgage obligations - fixed rate

     3         2,027         (14     3,605         (38     5,632         (52
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

  29      44,396      (379   5,711      (74   50,107      (453
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

  29    $ 44,396    $ (379 $   5,711    $   (74 $ 50,107    $ (453
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2014  
            Less than 12 months     More than 12 months     Total  
     Number      Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Securities available for sale:

                  

Mortgage-backed securities

                  

- Fixed rate

     3       $ —         $ —        $ 8,682       $ (101   $ 8,682       $ (101

- Variable rate

     1         2,789         (3     —           —          2,789         (3

Municipals - fixed rate

                  

-Tax exempt

     11         19,353         (165     —           —          19,353         (165

-Taxable

     1         301         —          —           —          301         —     

Collateralized mortgage obligations - fixed rate

     2         —           —          3,767         (65     3,767         (65
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available for sale

  18      22,443      (168   12,449      (166   34,892      (334
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

  18    $ 22,443    $ (168 $ 12,449    $ (166 $ 34,892    $ (334
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

All securities held as of March 31, 2015 were investment grade. The unrealized loss positions at March 31, 2015 were directly related to interest rate movements, and management believes there is minimal credit risk exposure in these investments. There is no intent to sell investments that were in an unrealized loss position at March 31, 2015, and it is more likely than not that the company will not be required to sell these investments before a recovery of unrealized losses. These investments were not considered to be other-than-temporarily impaired at March 31, 2015; therefore, no other-than-temporary impairment has been recognized in net income.

 

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Note 6. Loans

The following table presents the company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of the dates stated:

 

     March 31, 2015     December 31, 2014  
     Amount      Percent of
Total
    Amount      Percent of
Total
 

Commercial and industrial

   $ 355,329         46.9   $ 359,243         47.9

Commercial real estate

     282,528         37.3     267,489         35.6

Residential real estate

     40,180         5.3     40,859         5.4

Consumer

     11,342         1.5     11,456         1.5

Guaranteed student loans

     67,977         9.0     71,780         9.6

Overdrafts

     44         0.0     46         0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

$ 757,400      100.0 $ 750,873      100.0

Allowance for loan and lease losses

  (6,443   (6,247
  

 

 

      

 

 

    

Total loans, net of allowance

$ 750,957    $ 744,626   
  

 

 

      

 

 

    

Loans, excluding guaranteed student loans, include unearned fees net of capitalized origination costs, of $366 thousand and $297 thousand, as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, $246.0 million of loans were pledged to the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank as collateral for borrowing capacity.

As of March 31, 2015, the company had $68.0 million of guaranteed student loans including premium and acquisition costs of $1.8 million and $1.0 million, respectively, which are amortized into interest income on the effective interest method. The guaranteed student loans were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, these loans are substantially guaranteed by a guarantee agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers under defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders. The student loans carry an approximate 98% federal government guarantee as to the payment of principal and accrued interest.

 

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The following tables present the company’s loans by regulatory risk ratings classification and by loan type as of the dates stated. As defined by the Federal Reserve and adopted by the company, “special mention” loans are defined as having potential weaknesses that deserve management’s close attention; “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; and “doubtful” loans have all the weaknesses inherent in substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not categorized as special mention, substandard or doubtful are classified as “pass.” The company’s risk ratings, which are assigned to loans, are embedded within these categories.

 

     March 31, 2015  
     Pass      Special Mention      Substandard      Doubtful      Total Loans  

Purchased credit-impaired loans:

              

Commercial and industrial

   $ 437       $ 149       $ 496       $ —         $ 1,082   

Commercial real estate

     3,061         —           2,424         —           5,485   

Residential real estate

     157         —           882         —           1,039   

Consumer

     148         —           63         —           211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased credit-impaired loans

  3,803      149      3,865      —        7,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Originated and other purchased loans:

Commercial and industrial

  345,257      5,389      3,601      —        354,247   

Commercial real estate

  268,001      4,812      4,230      —        277,043   

Residential real estate

  37,184      598      1,359      —        39,141   

Consumer

  10,943      42      146      —        11,131   

Guaranteed student loans

  67,977      —        —        —        67,977   

Overdrafts

  44      —        —        —        44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated and other purchased loans

  729,406      10,841      9,336      —        749,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

$ 733,209    $ 10,990    $ 13,201    $ —      $ 757,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Pass      Special Mention      Substandard      Doubtful      Total Loans  

Purchased credit-impaired loans:

              

Commercial and industrial

   $ 462       $ 150       $ 524       $ —         $ 1,136   

Commercial real estate

     3,636         —           2,648         —           6,284   

Residential real estate

     126         10         908         —           1,044   

Consumer

     158         —           56         —           214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased credit-impaired loans

  4,382      160      4,136      —        8,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Originated and other purchased loans:

Commercial and industrial

  347,938      6,458      3,711      —        358,107   

Commercial real estate

  254,540      2,934      3,731      —        261,205   

Residential real estate

  37,818      765      1,232      —        39,815   

Consumer

  11,065      36      141      —        11,242   

Guaranteed student loans

  71,780      —        —        —        71,780   

Overdrafts

  46      —        —        —        46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated and other purchased loans

  723,187      10,193      8,815      —        742,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

$ 727,569    $ 10,353    $ 12,951    $ —      $ 750,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Allowance for Loan and Lease Losses

The allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.” A loan is impaired when, based on current information and events, it is probable that all amounts due (principal and interest) according to the contractual terms of the loan agreement will not be collected.

The allowance for loan and lease losses is determined based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that are originated by the company. In evaluating the loan portfolio, qualitative factors, such as general economic conditions, nationally and in the company’s target markets, are considered, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in the consolidated statements of income. Loans or portions of loans deemed to be uncollectible are charged against the allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses.

The company’s allowance for loan and lease losses related to guaranteed student loans is based on historical and expected default rates for these and similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guarantee.

The following table presents the allowance for loan and lease loss activity, by loan category, for the dates stated:

 

     March 31, 2015      March 31, 2014  

Balance at beginning of period

   $ 6,247       $ 5,305   

Charge-offs:

     

Commercial and industrial

     2         —     

Commercial real estate

     —           —     

Residential real estate

     —           35   

Consumer

     —           —     

Guaranteed student loans

     321         —     

Overdrafts

     4         1   
  

 

 

    

 

 

 

Total charge-offs

  327      36   
  

 

 

    

 

 

 

Recoveries:

Commercial and industrial

  —        1   

Commercial real estate

  1      —     

Residential real estate

  —        —     

Consumer

  1      —     

Guaranteed student loans

  —        —     

Overdrafts

  2      —     
  

 

 

    

 

 

 

Total recoveries

  4      1   
  

 

 

    

 

 

 

Net charge-offs

  323      35   
  

 

 

    

 

 

 

Provision for loan and lease losses

  565      227   

Amount for unfunded commitments

  —        (19

Other (1)

  (46   (64
  

 

 

    

 

 

 

Balance at end of period

$ 6,443    $ 5,414   
  

 

 

    

 

 

 

 

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

 

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Table of Contents

The company charges off the portion of its guaranteed student loans that are (1) not subject to federal government guarantee and (2) greater than 120 days past due and have a high probability of default. Probability of default is determined by recent loss migration analysis. Student loans greater than 120 days past due continue to accrue interest, with respect to the guaranteed portion, as interest receivable is guaranteed until a claim, if any, against the government guarantee is satisfied.

The following tables present the allowance for loan and lease losses, with the amount independently and collectively evaluated for impairment, and loan balances, by loan type, as of the dates stated:

 

    March 31, 2015  
    Total Amount     Individually Evaluated
for Impairment
    Collectively Evaluated
for Impairment
 

Allowance for loan losses applicable to:

     

Purchased credit-impaired loans

     

Commercial and industrial

  $ 35      $ 35      $ —     

Commercial real estate

    160        160        —     

Residential real estate

    50        50        —     

Consumer

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Total purchased credit-impaired loans

  245      245      —     
 

 

 

   

 

 

   

 

 

 

Originated and other purchased loans

Commercial and industrial

  2,001      326      1,675   

Commercial real estate

  3,988      123      3,865   

Residential real estate

  138      22      116   

Consumer

  —        —        —     

Guaranteed student loans

  71      —        71   
 

 

 

   

 

 

   

 

 

 

Total originated and other purchased loans

  6,198      471      5,727   
 

 

 

   

 

 

   

 

 

 

Total allowance for loan and lease losses

$ 6,443    $ 716    $ 5,727   
 

 

 

   

 

 

   

 

 

 

Loan balances applicable to:

Purchased credit-impaired loans

Commercial and industrial

$ 1,082    $ 934    $ 148   

Commercial real estate

  5,485      2,375      3,110   

Residential real estate

  1,039      552      487   

Consumer

  211      —        211   
 

 

 

   

 

 

   

 

 

 

Total purchased credit-impaired loans

  7,817      3,861      3,956   
 

 

 

   

 

 

   

 

 

 

Originated and other purchased loans

Commercial and industrial

  354,247      2,229      352,018   

Commercial real estate

  277,043      3,394      273,649   

Residential real estate

  39,141      523      38,618   

Consumer

  11,175      —        11,175   

Guaranteed student loans

  67,977      —        67,977   
 

 

 

   

 

 

   

 

 

 

Total originated and other purchased loans

  749,583      6,146      743,437   
 

 

 

   

 

 

   

 

 

 

Total loans

$ 757,400    $ 10,007    $ 747,393   
 

 

 

   

 

 

   

 

 

 

 

14


Table of Contents
    December 31, 2014  
    Total Amount     Individually Evaluated
for Impairment
    Collectively Evaluated
for Impairment
 

Allowance for loan losses applicable to:

     

Purchased credit-impaired loans

     

Commercial and industrial

  $ 34      $ 34      $ —     

Commercial real estate

    182        182        —     

Residential real estate

    36        36        —     

Consumer

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Total purchased credit-impaired loans

  252      252      —     
 

 

 

   

 

 

   

 

 

 

Originated and other purchased loans

Commercial and industrial

  2,174      326      1,848   

Commercial real estate

  3,577      123      3,454   

Residential real estate

  139      22      117   

Consumer

  —        —        —     

Guaranteed student loans

  105      —        105   
 

 

 

   

 

 

   

 

 

 

Total originated and other purchased loans

  5,995      471      5,524   
 

 

 

   

 

 

   

 

 

 

Total allowance for loan and lease losses

$ 6,247    $ 723    $ 5,524   
 

 

 

   

 

 

   

 

 

 

Loan balances applicable to:

Purchased credit-impaired loans

Commercial and industrial

$ 1,136    $ 989    $ 147   

Commercial real estate

  6,284      3,112      3,172   

Residential real estate

  1,044      554      490   

Consumer

  214      —        214   
 

 

 

   

 

 

   

 

 

 

Total purchased credit-impaired loans

  8,678      4,655      4,023   
 

 

 

   

 

 

   

 

 

 

Originated and other purchased loans

Commercial and industrial

  358,107      2,690      355,417   

Commercial real estate

  261,205      2,833      258,372   

Residential real estate

  39,815      384      39,431   

Consumer

  11,288      —        11,288   

Guaranteed student loans

  71,780      —        71,780   
 

 

 

   

 

 

   

 

 

 

Total originated and other purchased loans

  742,195      5,907      736,288   
 

 

 

   

 

 

   

 

 

 

Total loans

$ 750,873    $ 10,562    $ 740,311   
 

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

The following tables present the loans that were individually evaluated for impairment, by loan type, as of the dates stated. The tables present those loans with and without an allowance and various additional data, as of the dates stated:

 

     March 31, 2015  
     Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Purchased credit-impaired loans

        

Commercial and industrial

   $ 308       $ 1,411       $ —     

Commercial real estate

     513         738         —     

Residential real estate

     341         372         —     

Consumer

     —           —           —     

Originated and other purchased loans

        

Commercial and industrial

     1,065         1,087         —     

Commercial real estate

     3,204         3,778         —     

Residential real estate

     313         313         —     

Consumer

     —           —           —     

With an allowance recorded:

        

Purchased credit-impaired loans

        

Commercial and industrial

     626         621         35   

Commercial real estate

     1,862         1,980         160   

Residential real estate

     211         243         50   

Consumer

     —           —           —     

Originated and other purchased loans

        

Commercial and industrial

     1,164         1,164         326   

Commercial real estate

     190         197         123   

Residential real estate

     210         210         22   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

$ 10,007    $ 12,114    $ 716   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2014  
     Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Purchased credit-impaired loans

        

Commercial and industrial

   $ 336       $ 1,439       $ —     

Commercial real estate

     855         1,230         —     

Residential real estate

     181         216         —     

Consumer

     —           —           —     

Originated and other purchased loans

        

Commercial and industrial

     1,492         1,514         —     

Commercial real estate

     2,648         3,066         —     

Residential real estate

     173         173         —     

Consumer

     —           —           —     

With an allowance recorded:

        

Purchased credit-impaired loans

        

Commercial and industrial

     653         650         34   

Commercial real estate

     2,257         2,365         182   

Residential real estate

     373         405         36   

Consumer

     —           —           —     

Originated and other purchased loans

        

Commercial and industrial

     1,198         1,198         326   

Commercial real estate

     184         201         123   

Residential real estate

     212         212         22   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

$ 10,562    $ 12,669    $ 723   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     For the Three Months Ended March 31,  
     2015      2014  
     Average
Recorded
Investment
     Interest Income
Recognized
     Average
Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

           

Purchased credit-impaired loans

           

Commercial and industrial

   $ 326       $ —         $ 276       $ —     

Commercial real estate

     517         —           1,569         —     

Residential real estate

     343         —           —           —     

Consumer

     —           —           —           —     

Originated and other purchased loans

           

Commercial and industrial

     1,072         —           2,707         26   

Commercial real estate

     3,213         23         —           —     

Residential real estate

     313         2         311         2   

Consumer

     —           —           8         —     

With an allowance recorded:

           

Purchased credit-impaired loans

           

Commercial and industrial

     634         10         894         14   

Commercial real estate

     1,862         31         2,696         38   

Residential real estate

     211         —           139         —     

Consumer

     —           —           —           —     

Originated and other purchased loans

           

Commercial and industrial

     1,181         —           864         —     

Commercial real estate

     192         —           —           —     

Residential real estate

     211         —           1,208         —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans individually evaluated for impairment

$ 10,075    $ 66    $ 10,672    $ 80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acquired loans pursuant to a business combination are initially recorded at estimated fair value as of the date of acquisition; therefore, any related allowance for loan and lease losses is not carried over or established at acquisition. The difference between contractually required amounts receivable and the acquisition date fair value of loans that are not deemed credit-impaired at acquisition is accreted (recognized) into income over the life of the loan either on a straight-line basis or based on the underlying principal payments on the loan. Any deterioration in credit quality subsequent to acquisition for these loans is reflected in the allowance for loan and lease losses.

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that all contractually required principal and interest payments will not be collected are accounted for under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). A portion of the loans acquired in the VBB Acquisition and the CVB Acquisition were deemed by management to be credit-impaired loans qualifying for accounting under ASC 310-30.

The remaining fair value adjustment on the VBB and CVB purchased credit-impaired loans, as of March 31, 2015, was $1.6 million and $619 thousand, respectively. The carrying value of the VBB and CVB purchased credit-impaired loans, as of March 31, 2015, was approximately $5.5 million and $2.3 million, respectively, which is net of any impairment charges recorded subsequent to acquisition.

For purchased credit-impaired loans, the excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and accreted into interest income over the remaining life of the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference.

In applying ASC 310-30 to acquired loans, the company must periodically estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant

 

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judgment, including default rates, the amount and timing of prepayments and the liquidation value and timing of underlying collateral, in addition to other factors. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the initial accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield, which is a reclassification from the nonaccretable difference. The increased accretable yield is recognized in income over the remaining period of expected cash flows from the loan. Impairments and reversals of impairments are recorded in the provision for loan and lease losses in the consolidated statements of income and as a component of the allowance for loan and lease losses in the consolidated balance sheets.

The following table presents accretion activity related to acquired loans as of the dates stated:

 

     March 31, 2015      March 31, 2014  

Balance at beginning of period

   $ 5,580       $ 4,441   

Accretion (1)

     (483      (139

Other (2)

     46         64   
  

 

 

    

 

 

 

Balance at end of period

$ 5,143    $ 4,366   
  

 

 

    

 

 

 

 

(1) Accretion amounts are reported in interest income.
(2) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

The following tables present the age analysis of loans past due as of the dates stated:

 

     March 31, 2015  
     Current      30-89 days
Past Due
     90+ days
Past Due
     Total
Past Due
     Total
Loans
 

Purchased credit-impaired loans:

              

Commercial and industrial

   $ 586       $ 250       $ 246       $ 496       $ 1,082   

Commercial real estate

     5,135         171         179         350         5,485   

Residential real estate

     666         187         186         373         1,039   

Consumer

     201         —           10         10         211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased credit-impaired loans

  6,588      608      621      1,229      7,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Originated and other purchased loans:

Commercial and industrial

  353,515      24      708      732      354,247   

Commercial real estate

  272,262      2,961      1,820      4,781      277,043   

Residential real estate

  37,728      1,068      345      1,413      39,141   

Consumer

  10,578      525      72      597      11,175   

Guaranteed student loans

  45,349      6,740      15,888      22,628      67,977   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated and other purchased loans

  719,432      11,318      18,833      30,151      749,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

$ 726,020    $ 11,926    $ 19,454    $ 31,380    $ 757,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2014  
     Current      30-89 days
Past Due
     90+ days
Past Due
     Total
Past Due
     Total
Loans
 

Purchased credit-impaired loans:

              

Commercial and industrial

   $ 696       $ 222       $ 218       $ 440       $ 1,136   

Commercial real estate

     5,567         629         88         717         6,284   

Residential real estate

     668         230         146         376         1,044   

Consumer

     203         —           11         11         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased credit-impaired loans

  7,134      1,081      463      1,544      8,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Originated and other purchased loans:

Commercial and industrial

  356,511      873      723      1,596      358,107   

Commercial real estate

  258,975      1,490      740      2,230      261,205   

Residential real estate

  38,891      702      222      924      39,815   

Consumer

  11,140      113      35      148      11,288   

Guaranteed student loans

  46,821      12,025      12,934      24,959      71,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated and other purchased loans

  712,338      15,203      14,654      29,857      742,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

$ 719,472    $ 16,284    $ 15,117    $ 31,401    $ 750,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Guaranteed student loans comprised $6.7 million of the total amounts that were past due 30-89 days and $15.9 million of the total amounts that were past due 90 days or greater as of March 31, 2015. These loans are nearly 98% guaranteed as to principal and interest. Pursuant to the guaranty, the company may make a claim for payment on a loan after a period of 270 days during which no payment has been made on the loan.

The following table presents nonaccrual loans and other real estate owned (“OREO”) as of the dates stated. A loan is considered nonaccrual if it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of March 31, 2015, there were no loans, other than guaranteed student loans, past due 90 days or greater for which interest was accruing. Accrued interest on the guaranteed portion of student loans is subject to the guaranty and is payable under the claim, if any, to the time the claim is satisfied.

 

     March 31, 2015      December 31, 2014  

Purchased credit-impaired loans:

     

Commercial and industrial

   $ 436       $ 463   

Commercial real estate

     2,071        2,105  

Residential real estate

     951        962  

Consumer

     8        8  
  

 

 

    

 

 

 

Total purchased credit-impaired loans

  3,466     3,538  
  

 

 

    

 

 

 

Originated and other purchased loans:

Commercial and industrial

  2,351      2,311   

Commercial real estate

  1,321     930  

Residential real estate

  641     594  

Consumer

  4     4  
  

 

 

    

 

 

 

Total originated and other purchased loans

  4,317     3,839  
  

 

 

    

 

 

 

Total nonaccrual loans

$ 7,783    $ 7,377   

Other real estate owned

  1,145      1,140   
  

 

 

    

 

 

 

Total nonperforming assets

$ 8,928    $ 8,517   
  

 

 

    

 

 

 

 

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In accordance with Accounting Standards Update (“ASU”) No. 2011-02, “Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” the company assesses all restructurings for potential identification as troubled debt restructurings (“TDR”). A modification of a loan’s terms constitutes a TDR, if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Modifications of terms for loans that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal payments, regardless of the period of the modification.

For loans classified as TDRs, the company further evaluates the loans as performing or nonperforming. If at the time of restructure the loan is on accrual status, it will be classified as performing and will continue to be classified as performing as long as the borrower continues making payments in accordance with the restructured terms. A modified loan will be classified as nonaccrual, if the loan becomes 90 days delinquent, or when collectability is in doubt. TDRs originally considered nonaccrual will be classified as nonperforming, but may be classified as performing TDRs, if subsequent to restructure the loan experiences payment performance according to the restructured terms for a consecutive six-month period and other required conditions are met.

The following table presents performing and nonperforming loans identified as TDRs, by loan type, as of the dates stated:

 

     March 31, 2015      December 31, 2014  

Performing TDRs:

     

Commercial and industrial

   $ 2,276       $ 2,735   

Commercial real estate

     2,407         1,913   

Residential real estate

     223         87   

Consumer

     —           —     
  

 

 

    

 

 

 

Total performing TDRs

$ 4,906    $ 4,735   
  

 

 

    

 

 

 

Nonperforming TDRs:

Commercial and industrial

$ —      $ —     

Commercial real estate

  —        33   

Residential real estate

  125      265   

Consumer

  —        —     
  

 

 

    

 

 

 

Total nonperforming TDRs

$ 125    $ 298   
  

 

 

    

 

 

 

Total TDRs

$ 5,031    $ 5,033   
  

 

 

    

 

 

 

The following tables present loans classified as TDRs, including the type of modification, number of loans and loan type, as of the dates stated:

 

     March 31, 2015  
     Number of Loans
Modified
     Rate Modification      Term Extension and/or
Other Concessions
     Total  

Commercial and industrial

     7       $ 1,123       $ 1,153       $ 2,276   

Commercial real estate

     6         —           2,407         2,407   

Residential real estate

     3         223         125         348   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

  16    $ 1,346    $ 3,685    $ 5,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2014  
     Number of Loans
Modified
     Rate Modification      Term Extension and/or
Other Concessions
     Total  

Commercial and industrial

     8       $ 1,149       $ 1,586       $ 2,735   

Commercial real estate

     5         —           1,946         1,946   

Residential real estate

     3         87         265         352   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

  16    $ 1,236    $ 3,797    $ 5,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended March 31, 2015, the company identified two loans as TDRs, totaling $615 thousand, which are included in the tables above.

Note 7. Goodwill and Other Intangible Assets

The following table presents goodwill and other intangible assets, which are core deposit intangibles, as of the dates stated:

 

     March 31, 2015      December 31, 2014  

Amortizable core deposit intangibles:

     

Gross carrying value

   $ 4,640       $ 4,640   

Accumulated amortization

     (1,600      (1,486
  

 

 

    

 

 

 

Net core deposit intangibles

  3,040      3,154   
  

 

 

    

 

 

 

Goodwill

  12,989      12,989   
  

 

 

    

 

 

 

Total goodwill and other intangible assets, net

$ 16,029    $ 16,143   
  

 

 

    

 

 

 

Note 8. Deposits

The following table presents a summary of deposit accounts as of the dates stated:

 

     March 31, 2015      December 31, 2014  

Noninterest-bearing demand deposits

   $ 150,663       $ 121,230   

Interest-bearing:

     

Demand and money market deposits

     349,946         344,023   

Savings deposits

     10,181         10,108   

Time deposits of $100,000 or more

     249,950         213,920   

Other time deposits

     82,659         83,630   
  

 

 

    

 

 

 

Total deposits

$ 843,399    $ 772,911   
  

 

 

    

 

 

 

Note 9. Derivatives

Cash Flow Hedges

The company uses interest rate derivatives to manage its exposure to interest rate movements. The company is a party to three interest rate swap agreements, designated as cash flow hedges, in accordance with FASB ASC Topic 815, “Derivatives and Hedging.” Pursuant to one of the agreements, the company pays fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without exchange of the underlying notional amount of $20 million. Pursuant to the other two agreements, the company has minimized its exposure to interest rate movements by exchanging variable for fixed interest payments beginning at a specified future date without exchange of underlying notional amounts of $17.5 million.

 

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The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the three-month periods ended March 31, 2015 and 2014, the ineffective portion was insignificant. The amount reported in AOCI as of March 31, 2015 was a loss of $444 thousand, net of a tax benefit of $229 thousand. As of March 31, 2015, a liability of $691 thousand was recorded in other liabilities on the consolidated balance sheet related to these cash flow hedges.

Non-hedge Derivatives

Derivatives not designated as hedges are not speculative and result from a service the company provides to certain customers. The company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the company executes with third parties, thus minimizing its net exposure from such transactions. These derivatives do not meet hedge accounting requirements; therefore, changes in the fair value of both the customer derivative and the offsetting derivative are recognized in earnings. As of March 31, 2015, $1.1 million was recorded in other assets and $1.2 million was recorded in other liabilities related to non-designated hedges. For the three-month periods ended March 31, 2015 and 2014, $26 thousand and $87 thousand of income, respectively, were recorded in net income related to non-designated hedges.

The company has minimum collateral requirements with its counterparties for both cash flow hedges and non-hedge derivatives which contain provisions, whereby if the company fails to maintain its status as a well or an adequately capitalized institution, the company could be required to terminate or fully collateralize the derivative contract. Additionally, if the company defaults on any of its indebtedness, including default where repayment has not been accelerated by the lender, the company could also be in default on its derivative obligations. As of March 31, 2015, the valuation of these derivatives has surpassed the contractually specified minimum transfer amounts of $350 thousand, and $2.0 million has been pledged as collateral under the agreements. If the company is not in compliance with the terms of the derivative agreements, it could be required to settle its obligations under the agreements at termination value.

Note 10. Income Taxes

Net deferred tax assets as of March 31, 2015 and December 31, 2014 were $6.6 million and $6.3 million, respectively. The following table presents the statutory tax rate reconciled to the company’s effective tax rate for the dates stated:

 

     March 31, 2015     March 31, 2014  
     Tax      Rate     Tax      Rate  

Income tax expense at statutory rate

   $ 441         34.00   $ 158         34.00

Meals and entertainment

     2         0.16     2         0.46

Share-based compensation

     14         1.07     20         4.25

Transaction-related expenses

     —           0.00     60         13.01

Tax exempt income

     (92      -7.13     (30      -6.46

Other

     11         0.90     (1      -0.25
  

 

 

    

 

 

   

 

 

    

 

 

 

Income tax expense reported

$ 376      29.00 $ 209      45.01
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Note 11. Earnings per Common Share

The following tables summarize basic and diluted earnings per common share calculations for the periods stated. Weighted average shares outstanding for the calculation of basic earnings per share include vested restricted stock units. Excluded from the computation of diluted earnings per common share were 240,810 shares related to options, for the three months ended March 31, 2015, because their inclusion in the calculation would be anti-dilutive. The number of shares in the following table is in thousands.

 

     Three Months Ended March 31,  
     2015      2014  

Net income

   $ 921       $ 255   

Preferred stock dividend

     (21      (21
  

 

 

    

 

 

 

Net income available to common shareholders

$ 900    $ 234   
  

 

 

    

 

 

 

Weighted average shares outstanding, basic

  13,082      10,471   

Dilutive shares

  186      113   
  

 

 

    

 

 

 

Weighted average shares outstanding, diluted

  13,268      10,584   
  

 

 

    

 

 

 

Earnings per common share, basic

$ 0.07    $ 0.02   
  

 

 

    

 

 

 

Earnings per common share, diluted

$ 0.07    $ 0.02   
  

 

 

    

 

 

 

Note 12. Pension Plan

In connection with the CVB Acquisition, the company assumed the Colonial Virginia Bank Executive Retirement Plan (“SERP”). The SERP provides for the payment of supplemental retirement benefits to three former CVB executives. All benefits to the former CVB employees are fully vested and payments may begin six months following the employee’s termination, as defined by the SERP. As of March 31, 2015, one former CVB employee was receiving payments under the SERP. For the three months ended March 31, 2015, the company paid $23 thousand of benefits under the SERP. Beginning with the second quarter of 2015, the company expects to pay $134 thousand to two former employees through December 31, 2015. As of March 31, 2015, a $2.3 million liability was recorded on the company’s consolidated balance sheet related to the SERP. A discount rate of 4% was used in determining the SERP liability.

The company also has a grantor trust (rabbi trust) established as a source of funds to pay benefits under the SERP. As of March 31, 2015, $2.0 million in cash and investment securities was held in the rabbi trust and is recorded in other assets on the company’s consolidated balance sheet. The rabbi trust assets are subject to the general unsecured creditors of the company.

Note 13. Senior Term Loan

On September 30, 2014, the company entered into an agreement with a national bank that provides for an unsecured senior term loan credit facility up to $15 million (the “Credit Agreement”). The company borrowed $12 million upon the closing of the Credit Agreement on September 30, 2014 and has the right to borrow up to an additional $3 million under a delayed-draw term loan commitment, subject to customary conditions, on or before September 30, 2015. Repayments under the term loans were monthly payments of accrued interest only for the first six months and then, beginning on March 31, 2015, the term loans are repayable in monthly installments of principal, based on a 10-year amortization schedule, plus accrued interest. Unless extended or earlier prepaid, the maturity date of all term loans made under the Credit Agreement is September 30, 2019, at which time all unpaid principal, with accrued interest thereon, will become due and payable in full. All borrowings under the Credit Agreement bear interest at the 30-day LIBOR in effect from time to time, plus 3.5% per annum. The Credit Agreement is unsecured but the lender has the benefit of a negative pledge on all of the outstanding capital stock of the Bank. For the period ended March 31, 2015, the effective interest rate on the unsecured senior term loan was 3.92%.

The Credit Agreement contains financial covenants that require (1) the company to be, and to cause the Bank to be, “well- capitalized” as defined in federal banking regulations, at all times, (2) the Bank’s total risk-based capital ratio to be at least equal to 11.5% as of the last day of each fiscal quarter, (3) the Bank’s ratio of nonperforming assets to tangible primary capital to be no more than 30% as of the last day of each fiscal quarter, (4) the Bank’s ratio of loan loss reserves, including loans discounts relating to acquired loans, to nonperforming loans to be at least equal to 70% at all times and (5) the company’s fixed charge coverage ratio, determined on a consolidated basis, to be at least 1.25 to 1.0 at the end of each fiscal quarter for the trailing four fiscal quarters. As of March 31, 2015, the company and the Bank, as applicable, were in compliance with these financial covenants.

 

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Note 14. Senior Non-Cumulative Perpetual Preferred Stock

On September 21, 2011, the company issued and sold 8,381 shares of non-cumulative perpetual preferred stock to the Secretary of the U.S. Treasury (the “SBLF Preferred Stock”) for a purchase price of $8.4 million. The SBLF Preferred Stock investment qualifies as Tier 1 capital. The SBLF Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. After the four-and-a-half-year period from initial funding, the rate will increase to 9% until the senior preferred stock issued to the U.S. Treasury is redeemed. For the three-month periods ended March 31, 2015 and 2014, the company’s dividend was $21 thousand, representing an effective dividend rate of 1% for both periods.

Note 15. Commitment and Contingencies

In the normal course of business, the Bank has commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additionally, the Bank issues letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

The following table presents unfunded commitments outstanding as of the dates stated:

 

     March 31, 2015      December 31, 2014  

Commercial lines of credit

   $ 130,146       $ 127,363   

Commercial real estate

     63,624         63,950   

Residential real estate

     10,443         10,949   

Consumer

     3,049         2,936   

Letters of credit

     10,152         9,777   
  

 

 

    

 

 

 

Total commitments

$ 217,414    $ 214,975   
  

 

 

    

 

 

 

In addition, the Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of March 31, 2015, the Bank had invested $750 thousand. An additional $250 thousand will be funded at the request of the general partner of the partnership.

Note 16. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Under the guidance in ASC 820, the company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value to such assets or liabilities.

 

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The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The company evaluates its hierarchy disclosures each quarter, and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The company expects changes in classifications between levels will be rare.

Securities available for sale:

Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other real estate owned:

OREO is measured at the asset’s fair value less costs for disposal. The company estimates fair value at the asset’s liquidation value less disposal costs using management’s assumptions, which are based on current market analysis or recent appraisals. OREO is classified as a nonrecurring Level 3 valuation.

Impaired loans:

The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of March 31, 2015, all of the impaired loans accounted for under ASC 310-30 were evaluated based on discounted cash flows or on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or management evaluates fair value based on discounted cash flows, the company records the impaired loan as nonrecurring Level 3.

Derivatives:

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2015 and December 31, 2014, the company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

In conjunction with the FASB’s fair value measurement guidance, the company has elected to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Other assets:

Assets held in the company’s rabbi trust consist of cash and marketable securities. The carrying value for cash and cash equivalents approximates fair value. Securities include those traded on nationally recognized securities exchanges. Other assets are classified as a recurring Level 1 valuation.

 

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Cash, cash equivalents and accrued interest:

The carrying value for cash and cash equivalents and accrued interest approximates fair value.

The methodology for measuring the fair value of other financial assets and financial liabilities that are not recorded at fair value on a recurring or nonrecurring basis are discussed below.

Securities held to maturity:

Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Performing loans:

For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms.

Deposit liabilities:

The balance of demand, money market and savings deposits approximates the fair value payable on demand to the accountholder. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings:

The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses at the company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of long-term borrowings, for which interest rates reset quarterly or less, approximate their fair value.

Other commitments:

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date or “settlement date.”

 

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As noted, certain assets and liabilities are measured at fair value on a recurring and nonrecurring basis. The following tables present assets measured at fair value on a recurring and nonrecurring basis as of the dates stated:

 

            Fair Value Measurements as of March 31, 2015 Using  
     March 31,
2015 Balance
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets and liabilities measured on a recurring basis:

           

Securities available for sale

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,201       $ —         $ 11,201       $ —     

Municipals

     50,240         —           50,240         —     

Collateralized mortgage obligations

     11,557         —           11,557         —     

Cash flow hedge - liability

     (691      —           (691      —     

Interest rate derivative - asset

     1,101         —           1,101         —     

Interest rate derivative - liability

     (1,166      —           (1,166      —     

Other assets

     2,003         2,003         —           —     

Assets measured on a nonrecurring basis:

           

Impaired loans

     10,007         —           —           10,007   

Other real estate owned

     1,145         —           —           1,145   
            Fair Value Measurements as of December 31, 2014 Using  
     December 31,
2014 Balance
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets and liabilities measured on a recurring basis:

           

Securities available for sale

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,543       $ —         $ 11,543       $ —     

- Variable rate

     4,239         —           4,239         —     

Municipals

     38,595         9,021         29,574         —     

Collateralized mortgage obligations

     9,964         —           9,964         —     

Cash flow hedge - liability

     (423      —           (423      —     

Interest rate derivative - asset

     809         —           809         —     

Interest rate derivative - liability

     (852      —           (852      —     

Other assets

     2,030         2,030         —           —     

Assets measured on a nonrecurring basis:

           

Impaired loans

     10,562         —           —           10,562   

Other real estate owned

     1,140         —           —           1,140   

Certain municipal securities in the amount of $9.0 million as of December 31, 2014 were classified as Level 1 at December 31, 2014 and as Level 2 at March 31, 2015. All of these securities were purchased in December 2014 and the fair value of these securities at December 31, 2014 reflected the trade or purchase price, therefore classified as Level 1. Subsequent to trade date, these securities are classified as Level 2.

 

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The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis for which the company has utilized Level 3 inputs to determine fair value:

 

     Quantitative Information about Level 3 Fair Value Measurements  
     Fair Value at
March 31, 2015
    

Valuation Techniques

   Unobservable Input    Range  

Impaired Loans

   $ 10,007      

Collateral value,

market value of similar

debt, enterprise value,

liquidation value

and/or discounted cash

flows

   Yield      0-29

Other real estate owned (1)

     1,145      

Market analysis or

recent appraisals

   Disposal costs      N/A   

 

(1) The fair value of these assets is determined based on appraisal value or sales price less estimated disposal costs, if applicable, the range of which is not meaningful to disclose.

 

     Quantitative Information about Level 3 Fair Value Measurements  
     Fair Value at
December 31, 2014
    

Valuation Techniques

   Unobservable Input    Range  

Impaired Loans

   $ 10,562      

Collateral value,

market value of similar

debt, enterprise value,

liquidation value

and/or discounted cash

flows

   Yield      0-29

Other real estate owned (1)

     1,140      

Market analysis or

recent appraisals

   Disposal costs      N/A   

 

(1) The fair value of these assets is determined based on appraisal value or sales price less estimated disposal costs, if applicable, the range of which is not meaningful to disclose.

 

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The following tables present the carrying amounts and approximate fair values of the company’s financial assets and liabilities as of the dates stated:

 

     March 31, 2015      Fair Value Measurements as of March 31, 2015 Using  
     Carrying
Amount
     Estimated
Fair Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Financial assets:

              

Cash and due from banks

   $ 44,072       $ 44,072       $ 44,072       $ —         $ —     

Federal funds sold

     53,200         53,200         —           53,200         —     

Securities available for sale

     72,998         72,998         —           72,998         —     

Securities held to maturity

     9,276         9,893         —           9,893         —     

Loans, net

     750,957         752,060         —           —           752,060   

Interest rate derivative

     1,101         1,101         —           1,101         —     

Accrued interest receivable

     3,983         3,983         —           3,983         —     

Other assets

     2,003         2,003         2,003         —           —     

Financial liabilities:

              

Cash flow hedge

   $ 691       $ 691       $ —         $ 691       $ —     

Interest rate derivative

     1,166         1,166         —           1,166         —     

Federal funds purchased

     25         25         —           25         —     

Borrowings

     31,900         31,900         —           31,900         —     

Deposits

     843,399         841,985         —           841,985         —     

Accrued interest payable

     278         278         —           278         —     

 

     December 31, 2014      Fair Value Measurements as of December 31, 2014 Using  
     Carrying
Amount
     Estimated
Fair Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Financial assets:

              

Cash and due from banks

   $ 34,666       $ 34,666       $ 34,666       $ —         $ —     

Federal funds sold

     4,533         4,533         —           4,533         —     

Securities available for sale

     64,341         64,341         9,021         55,320         —     

Securities held to maturity

     9,279         9,683         —           9,683         —     

Loans, net

     744,626         745,187         —           —           745,187   

Interest rate derivative

     809         809         —           809         —     

Accrued interest receivable

     3,498         3,498         —           3,498         —     

Other assets

     2,030         2,030         2,030         —           —     

Financial liabilities:

              

Cash flow hedge

   $ 423       $ 423       $ —         $ 423       $ —     

Interest rate derivative

     852         852         —           852         —     

Borrowings

     32,000         32,000         —           32,000         —     

Deposits

     772,911         771,997         —           771,997         —     

Accrued interest payable

     276         276         —           276         —     

 

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Fair value estimates are made at a specific point in time and are based on relevant market information, as well as information about the financial instruments or other assets. These estimates do not reflect any premium or discount that could result from offering for sale the company’s entire holdings of a particular financial instrument at one time. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment, and OREO. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 17. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (ASU Subtopic 310-40), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in this ASU are intended to clarify the terms defining when an in substance repossession or foreclosure occurs, which determines when the receivable should be derecognized and the real estate property recognized. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this standard did not have a significant impact on the company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption prohibited. In April 2015, the FASB proposed to delay the effective date of this standard for one year. The company is evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the company’s consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q (“Form 10-Q”) and Part II, Item 8, “Financial Statements and Supplementary Data” in the company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”). The data presented as of March 31, 2015 and for the three-month periods ended March 31, 2015 and 2014 is derived from our unaudited interim financial statements and includes, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period. The data presented as of December 31, 2014 is derived from our audited financial statements as of and for the year ended December 31, 2014, which is included in the 2014 Form 10-K.

All references to “Xenith Bankshares,” “our company,” “the company,” “we,” “our” or “us” are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xenith Bank, collectively. All references to “the Bank” are to Xenith Bank.

All dollar amounts included in the tables in this discussion and analysis are in thousands, except per share data. Columns and rows of amounts presented in tables may not total due to rounding.

BUSINESS OVERVIEW

Xenith Bankshares, Inc. is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail clients, which we refer to as our target customers. We are geographically focused on the Greater Washington, DC, Richmond, Virginia, and the Greater Hampton Roads, Virginia metropolitan statistical areas, which we refer to as our target markets. The Bank conducts its principal banking activities through its eight branches, with one branch located in Tysons Corner, Virginia, two branches located in Richmond, Virginia, three branches located in Suffolk, Virginia, and two branches located in Gloucester, Virginia. The Bank also has a loan production office in York County, Virginia. We acquired the three branches located in Suffolk in the merger of Xenith Corporation with and into First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. Prior to the merger, SuffolkFirst Bank opened the first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the SuffolkFirst Bank branches now operate under the name Xenith Bank. We acquired the two branches in Gloucester and the loan production office in the acquisition of Colonial Virginia Bank (“CVB”) on June 30, 2014, which is further discussed below. The acquired CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time. As of March 31, 2015, we had total assets of $992.7 million, total loans, net of our allowance for loan and lease losses, of $751.0 million, total deposits of $843.4 million, and shareholders’ equity of $107.1 million.

Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet and mobile banking and bill pay service. We do not engage in any activities other than banking activities.

In September 2014, we issued and sold in a private placement an aggregate of 880,000 shares of our common stock, $1.00 par value per share, at a price of $6.35 per share to third-party investors for an aggregate purchase price, net of stock issuance costs, of approximately $5.6 million.

Also in September 2014, we entered into an agreement with a national bank that provides for an unsecured senior term loan credit facility up to $15 million (the “Credit Agreement”). We borrowed $12 million upon the closing of the Credit Agreement on September 30, 2014, and have the right to borrow up to an additional $3 million under a delayed-draw term loan commitment, subject to customary conditions, on or before September 30, 2015.

We contributed a significant portion of the proceeds of both the sale of our common stock and borrowings under the Credit Agreement to the Bank as equity. We retained the remainder of the proceeds to fund holding company obligations, including obligations under the Credit Agreement for a period of time.

During the second quarter of 2014, we determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment on our consolidated balance sheets. Prior to the second quarter of 2014, these loans were classified as loans held for sale. All prior periods presented were revised to reflect this classification. For additional information, see Part I, Item 1, Note 2. Basis of Presentation, Revision of Financial Statements.

 

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The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on liabilities used to fund those assets. Interest-earning assets include loans, securities and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of noninterest income include service charges on deposit accounts, fees on treasury services, gains on the sale of securities and other assets, and other miscellaneous income. Deposits, Federal Home Loan Bank (“FHLB”) borrowed funds, borrowed funds from other sources, and federal funds purchased are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits. Measures of our performance include net interest margin, return on average assets (“ROAA”), return on average equity (“ROAE”), and efficiency ratio. Such measures are common performance indicators in the banking industry.

The following table presents selected financial performance measures, for the dates stated:

 

     Three Months Ended March 31,  
     2015     2014  

Net interest margin (1)

     3.38     3.42

Return on average assets (2)

     0.39     0.15

Return on average common equity (3)

     3.73     1.27

Efficiency ratio (4)

     76     88

 

(1) Net interest margin is net interest income divided by average interest-earning assets. Average interest-earning assets are presented within the average balances, income and expenses, yields and rates table below.
(2) ROAA is net income divided by average total assets. Average total assets are presented within the average balances, income and expenses, yields and rates table below.
(3) ROAE is net income divided by average shareholders’ equity less average preferred stock. Average shareholders’ equity is presented within the average balances, income and expenses, yields and rates table below.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.

Acquisitions

On June 30, 2014, the company completed the merger of CVB with and into the Bank, with the Bank being the surviving bank (the “CVB Acquisition”). At the effective time of the CVB Acquisition, each share of CVB common stock outstanding immediately prior to the effective time of the CVB Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock.

Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. Based on the Exchange Ratio, an aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Pursuant to the CVB Acquisition, the company acquired $114.4 million of assets, including $70.1 million in loans and assumed $103.9 million in liabilities, including $101.0 million of deposits. Such amounts include preliminary estimated fair value adjustments, which are subject to change.

Industry Conditions

The national unemployment rate, seasonally adjusted and as published by the Bureau of Labor Statistics, for March 2015 was reported at 5.5%, a slight decline from 5.6% in December 2014. In the Fifth District of the Federal Reserve Bank (the “Fifth District”), which includes our target markets, the February 2015 (most recent) unemployment rate was 5.5%, unchanged from 5.5% at the end of 2014. More specifically, the unemployment rate in Virginia in February 2015 was 4.7%, based on data published by the Fifth District. Additionally, as published by the Fifth District, in the last year, all industry sectors in the Fifth District expanded. The Federal Open Market Committee (the “FOMC”) stated in a March 18, 2015 release that economic growth has moderated somewhat and labor market

 

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conditions have improved further, with strong job gains and a lower unemployment rate. The FOMC stated household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened.

The FOMC reaffirmed its view that the current 0 to  14% target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the FOMC stated it will assess progress (both realized and expected) toward its objectives of maximum employment and 2% inflation. The FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run. The FOMC also stated that it will be appropriate to raise the target range when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in forward guidance does not indicate a decision on the timing of the initial increase in the target range.

Low interest rates and intense competition, due to limited business investment, in addition to other factors, have put pressure on net interest margins of banks, including the Bank. Banks with which we compete are offering aggressive terms and may be loosening credit underwriting standards. We anticipate intense competition in our markets until the economy shows stronger signs of improvement.

Outlook

We believe we are well positioned to take advantage of competitive opportunities. We believe we will benefit from (1) our team of skilled bankers, (2) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team. We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets, and by executing strategically advantageous combinations.

Intense competition for quality loans in this low interest rate environment requires that we remain firm in applying our established credit underwriting practices, providing exceptional customer service, and offering competitive treasury services products, as well as continually monitoring our expenses.

In our continuing evaluation of our business strategy, we continue to believe that properly priced acquisitions can complement our organic growth. We may seek to acquire other financial institutions or branches or assets of those institutions. Although our principal acquisition focus will be to expand our presence in our target markets, we may also expand into new markets or related banking lines of business and related services and products. We evaluate potential acquisitions to determine what is in the best interest of our company and long-term strategy. Our goal in making these decisions is to maximize shareholder value.

Critical Accounting Policies

Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America and conform to general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and the amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or results of operations or both our consolidated financial position and results of operations.

We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, including our measurement of probable cash flows with respect to purchased credit-impaired loans accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which reflects our estimate of losses in the event of borrower default. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under “—Financial Condition—Allowance for Loan and Lease Losses” below and in measuring impairment for purchased credit-impaired loans is contained under “—Financial Condition—Allowance for Loan and Lease Losses —Acquired Loans” below.

Our critical accounting policies are discussed in detail in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and “Summary of Significant Accounting Policies” in the notes to the consolidated financial statements in our 2014 Form 10-K. Since December 31, 2014, there have been no changes in these policies that have had or could reasonably be expected to have a material effect on our results of operations or financial condition.

 

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RESULTS OF OPERATIONS

Net Income

For the three months ended March 31, 2015, net income was $921 thousand compared to net income of $255 thousand for the three months ended March 31, 2014. Income before income tax expense was $1.3 million for the three months ended March 31, 2015 compared to income before income tax expense of $464 thousand for the same period in 2014. In the three months ended March 31, 2014, pretax income included $205 thousand of costs related to the CVB Acquisition.

The following table presents our net income and earnings per common share information for the periods stated:

 

     Three Months Ended March 31,  
     2015      2014  

Net income

   $ 921       $ 255   
  

 

 

    

 

 

 

Preferred stock dividend

  (21   (21
  

 

 

    

 

 

 

Net income available to common shareholders

$ 900    $ 234   
  

 

 

    

 

 

 

Earnings per common share, basic and diluted

$ 0.07    $ 0.02   
  

 

 

    

 

 

 

Net Interest Income

For the three months ended March 31, 2015, net interest income was $7.3 million compared to $5.5 million for the three months ended March 31, 2014. Higher net interest income in the 2015 period was primarily due to higher average balances of loans held for investment and higher yields on our investment portfolio, partially offset by both higher balances and costs of our deposits. Higher average balances of loans held for investment, which increased $225.0 million, and deposits, which increased $207.7 million, were partially due to the addition of $70.1 million in loans and $101.0 million in deposits acquired in the CVB Acquisition on June 30, 2014. Higher earnings on average balances of investments was a result of a re-positioning of our investment portfolio to securities with higher yields and longer maturities. Higher costs of average balances of deposits in the 2015 period was primarily a result of targeted deposit promotions in several of our markets to fund loan growth and the addition of the borrowing under the Credit Agreement.

As presented in the table below, our net interest margin for the three-month period ended March 31, 2015 was 3.38%, a 4 basis point decrease from 3.42% for the three-month period ended March 31, 2014. Excluding the effect of purchase accounting adjustments, net interest margin declined 18 basis points for the three-month period ended March 31, 2015 compared to the same period of 2014. Higher average balances of our mortgage warehouse loans in the 2015 period compared to the 2014 period negatively affected our net interest margin as these loans have a lower yield than other loan categories. Additionally, the continued low interest rate environment and competition for quality borrowers continues to put pressure on our asset yields and net interest margin.

Average interest-earning assets increased $236.8 million, while related interest income increased $2.4 million, for the three-month period ended March 31, 2015 compared to the same period in 2014. Average interest-bearing liabilities increased $211.6 million, while related interest expense increased $608 thousand, for the three-month period ended March 31, 2015 compared to the same period in 2014. Yields on interest-earning assets increased 9 basis points to 4.05%, and costs of interest-bearing liabilities increased 14 basis points to 0.85%, when comparing the three-month period ended March 31, 2015 to the same period in 2014. Average interest-earning assets as a percentage of total assets were 93.1% for the three-month period ended March 31, 2015, a slight decline from 93.5% for the same period in 2014.

Our loan portfolios acquired in mergers and acquisitions, including the CVB Acquisition, were discounted to estimated fair value (for credit and interest rates) as of the acquisition dates. A portion of the discounts taken to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans or the period of expected cash flows from the loans. Amounts received in excess of the carrying value of loans accounted for on cost recovery are also accreted into interest income at the time of recovery. Loan discount accretion was $483 thousand for the three months ended March 31, 2015 compared to $139 thousand for the same period ended March 31, 2014.

 

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The following table presents the effect of purchase accounting adjustments on our net interest margin for the periods stated:

 

     Three Months Ended March 31,  
     2015     2014  

Net interest margin

     3.38     3.42

Purchase accounting adjustments impact (1)

     0.23     0.09

Net interest margin excluding the impact of purchase accounting adjustments

     3.15     3.33

 

(1) Purchase accounting adjustments include accretion of discounts on acquired loans.

 

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The following table provides an analysis of the effective yields and rates on average interest-earning assets and average interest-bearing liabilities as of and for the periods stated. The average balances and other statistical data used in this table were calculated using daily average balances. Tax-exempt income is reported on a taxable equivalent basis.

 

    Average Balances, Income and Expenses, Yields and Rates  
    As of and For the Three Months Ended March 31,  
                                        2015 vs. 2014  
    Average Balances (1)     Yield / Rate     Income / Expense (7) (8)
(10)
    Increase     Change due to (2)  
    2015     2014     2015     2014     2015     2014     (Decrease)     Rate     Volume  

Assets

                 

Interest-earning assets:

                 

Federal funds sold

  $ 20,243     $ 6,248       0.24     0.22   $ 12     $ 3     $ 9     $ 0     $ 9  

Interest-earning deposits

    24,685       10,946       0.25     0.32     16       9       7       (2     9  

Investments

    81,167       73,501       3.13     2.34     636       429       206       158       48  

Guaranteed student loans, gross

    70,031       93,698       3.28     3.22     574       754       (179     15       (194

Loans held for investment, gross (3) (9)

    680,202       455,158       4.49     4.52     7,633       5,140       2,493       (32     2,525  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

  876,328     639,551     4.05   3.96   8,871     6,335     2,536     139     2,396  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan and lease losses

  (6,404   (5,388

Noninterest-earning assets:

Cash and due from banks

  13,753     10,330  

Premises and fixed assets

  8,014     5,009  

Other assets

  49,201     34,562  
 

 

 

   

 

 

               

Total noninterest-earning assets

  70,968     49,901  
 

 

 

   

 

 

               

Total assets

$ 940,892   $ 684,064  
 

 

 

   

 

 

               

Liabilities and Shareholders’ Equity

Interest-bearing liabilities:

Demand deposits

$ 68,558   $ 29,874     0.54   0.18 $ 92   $ 13   $ 79   $ 48   $ 31  

Savings and money market deposits

  284,367     217,336     0.75   0.51   530     279     251     149     102  

Time deposits

  311,815     209,791     0.83   0.90   644     475     169     (45   214  

Federal funds purchased and borrowed funds

  32,181     28,354     2.61   1.41   210     100     110     95     15  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

  696,921     485,355     0.85   0.71   1,476     867     609     248     361  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest-bearing liabilities:

Noninterest-bearing demand deposits

  129,458     106,451  

Other liabilities

  7,469     3,615  
 

 

 

   

 

 

               

Total noninterest-bearing liabilities

  136,927     110,066  
 

 

 

   

 

 

               

Shareholders’ equity

  107,044     88,643  
 

 

 

   

 

 

               

Total liabilities and shareholders’ equity

$ 940,892   $ 684,064  
 

 

 

   

 

 

               

Interest rate spread (4)

  3.20   3.25

Net interest income (5)

$ 7,395   $ 5,468   $ 1,927   $ (109 $ 2,036  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (6)

  3.38   3.42

 

 

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(1) Average balances are computed on a daily basis.
(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.
(3) Nonaccrual loans have been included in the average balances. Guaranteed student loans are excluded.
(4) Interest rate spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.
(5) Net interest income is interest income less interest expense.
(6) Net interest margin is net interest income divided by average interest-earning assets.
(7) Tax-exempt interest income is stated on a taxable-equivalent basis.
(8) Interest income from loans held for investment in 2015 and 2014 includes $483 thousand and $139 thousand, respectively, in accretion related to acquired loans.
(9) Balances previously reported as loans held for sale have been reclassified as loans held for investment, gross.
(10) Interest expense on time deposits in 2015 includes a reduction of $19 thousand related to fair value adjustments recorded pursuant to the CVB Acquisition.

Provision for Loan and Lease Losses

For three months ended March 31, 2015, our provision for loan and lease losses was $565 thousand compared to $227 thousand for the same period of 2014. Higher provision expense in the three-month period ended March 31, 2015 was primarily due to higher accretion in the 2015 period, which decreases discounts on acquired loans a portion of which results in increased allowance needs, higher provision for guaranteed student loans, which is further discussed below, and a reduction in allowance needs due to an improvement in certain qualitative factors.

Noninterest Income

For the three months ended March 31, 2015, noninterest income was $412 thousand compared to $320 thousand for the same period of 2014. Greater noninterest income in the 2015 period was primarily due to higher noninterest income resulting from higher service charges and fees on deposit accounts, including fees from treasury management services, partially offset by lower income on derivatives and the market value of assets held in rabbi trust, including costs associated with our supplemental executive retirement plan, which was assumed in the CVB Acquisition.

Noninterest Expense

For the three-month period ended March 31, 2015, noninterest expense was $5.8 million compared to $5.1 million in the same period in 2014. Noninterest expense in the 2014 period included $205 thousand of expenses, primarily professional fees, related to the CVB Acquisition. Higher noninterest expense in the 2015 period was primarily due to higher compensation and benefits of $459 thousand and higher technology and data processing costs of $131 thousand. Higher compensation and benefits were primarily the result of management incentive charges incurred in the three-months ended March 31, 2015 for which there were none recorded in the 2014 period and the addition of personnel who joined the Bank as a result of the CVB Acquisition. Higher technology and data processing costs in the first three months of 2015 were primarily due to increased processing volumes added with the CVB Acquisition and with other growth. Higher FDIC insurance and bank franchise taxes was primarily due to our growth, and higher amortization of intangibles was due to the addition of core deposit intangibles with the CVB Acquisition.

Income Taxes

For the three-month periods ended March 31, 2015 and 2014, income tax expense was $376 thousand and $209 thousand, respectively, reflecting effective tax rates of 29% and 45%, respectively. The effective rate in the first quarter of 2015 reflects the net benefit of tax-exempt interest and increased balances of bank owned life insurance, while the rate in the first quarter of 2014 reflects the nondeductibility of certain merger-related transaction costs. Net deferred tax assets as of March 31, 2015 and December 31, 2014 were $6.6 million and $6.3 million, respectively.

 

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BUSINESS COMBINATION

The CVB Acquisition was accounted for in accordance with FASB ASC Topic 805, “Business Combinations,” whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates were based on our assessment of the best information available as of the acquisition date and are subject to change.

The following table presents the preliminary allocation of the consideration received to the assets acquired and liabilities assumed in the CVB Acquisition as of the acquisition date. Our preliminary allocation resulted in a bargain purchase gain of $42 thousand.

 

Fair value of assets acquired:

  

Cash and cash equivalents

$ 12,560   

Securities available for sale

  17,439   

Loans

  70,051   

Premises and equipment

  3,338   

Other real estate owned

  1,186   

Core deposit intangible

  930   

Accrued interest receivable

  318   

Deferred tax asset

  1,898   

Bank owned life insurance

  4,054   

Other assets

  2,658   
  

 

 

 

Total assets

$ 114,432   
  

 

 

 

Fair value of liabilities assumed:

Deposits

$ 100,985   

Accrued interest payable

  39   

Supplemental executive retirement plan

  2,277   

Other liabilities

  599   
  

 

 

 

Total liabilities

$ 103,900   
  

 

 

 

Net identifiable assets acquired

$ 10,532   

Consideration paid:

Company’s common shares issued

  1,618,186   

Purchase price per share (1)

$ 6.40   
  

 

 

 

Value of common stock issued

  10,356   

Estimated fair value of stock options

  133   

Cash in lieu of fractional shares

  1   
  

 

 

 

Total consideration paid

$ 10,490   
  

 

 

 

Bargain purchase gain

$ 42   
  

 

 

 

 

(1) The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

 

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FINANCIAL CONDITION

Securities

The following tables present information about our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis.

 

     March 31, 2015  
     Amortized Cost      Fair Value      Weighted
Average Life
in Years
     Weighted
Average Yield
 

Securities available for sale:

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,114       $ 11,201         5.05         2.12

Municipals - fixed rate

           

- Taxable

     3,862         3,870         5.78         2.21

- Tax exempt

     46,545         46,370         8.93         4.09

Collateralized mortgage obligations - fixed rate

     11,508         11,557         4.42         2.04
  

 

 

    

 

 

       

Total securities available for sale

  73,029      72,998      7.45      3.36
  

 

 

    

 

 

       

Securities held to maturity:

Municipals - fixed rate

- Taxable

  9,276      9,893      7.62      3.40
  

 

 

    

 

 

       

Total securities held to maturity

  9,276      9,893      7.62      3.40
  

 

 

    

 

 

       

Total securities

$ 82,305    $ 82,891      7.39      3.37
  

 

 

    

 

 

       

 

     December 31, 2014  
     Amortized Cost      Fair Value      Weighted
Average Life
in Years
     Weighted
Average Yield
 

Securities available for sale:

           

Mortgage-backed securities

           

- Fixed rate

   $ 11,513       $ 11,543         5.31         2.19

- Variable rate

     4,136         4,239         6.91         1.68

Municipals - fixed rate

           

- Taxable

     847         848         4.34         1.83

- Tax exempt

     37,825         37,747         8.77         4.04

Collateralized mortgage obligations - fixed rate

     9,974         9,964         3.72         2.04
  

 

 

    

 

 

       

Total securities available for sale

  64,295      64,341      7.19      3.21
  

 

 

    

 

 

       

Securities held to maturity:

Municipals - fixed rate

- Taxable

  9,279      9,683      8.23      3.40
  

 

 

    

 

 

       

Total securities held to maturity

  9,279      9,683      8.23      3.40
  

 

 

    

 

 

       

Total securities

$ 73,574    $ 74,024      7.24      3.24
  

 

 

    

 

 

       

 

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Table of Contents

In late 2014 and early 2015, we sold certain securities, primarily mortgage-backed securities, and purchased additional municipal securities, increasing both the weighted average life and weighted average yield of our securities portfolio.

The following table presents a maturity analysis of our securities portfolio as of the dates stated. Weighted average yield calculations are based on the current level of contractual maturities and expected prepayments as of the dates stated. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis.

 

    March 31, 2015  
    Within 1
Year
    Weighted
Average
Yield
    After 1
Year
Through 5
Years
    Weighted
Average
Yield
    After 5
Years
Through
10 Years
    Weighted
Average
Yield
    After 10
Years
    Weighted
Average
Yield
    Total     Weighted
Average
Yield
 

Securities available for sale:

                   

Mortgage-backed securities

                   

- Fixed rate

    —          —          —          —          1,642       2.85     9,559       2.00     11,201       2.12

Municipals - fixed rate

                   

- Taxable

        851       1.83     3,020       2.31     —          —          3,871       2.21

- Tax exempt

    302       1.53     —          —          2,533       3.02     43,534       4.17     46,369       4.09

Collateralized mortgage obligations - fixed rate

    —          —          —          —          2,027       2.03     9,530       2.04     11,557       2.04

Total securities available for sale

    302         851         9,222         62,623         72,998    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Securities held to maturity:

Municipals - fixed rate

- Taxable

  —        —        —        —        8,868     3.31   1,025     4.11   9,893     3.39
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total securities held to maturity

  —        —        8,868     1,025     9,893  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total securities

$ 302     1.53 $ 851     1.83 $ 18,090     2.92 $ 63,648     3.52 $ 82,891     3.37
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

The following table presents the amortized cost and fair value of securities for which the amortized cost exceeded 10% of shareholders’ equity as of the date stated:

 

     March 31, 2015  
     Amortized Cost      Fair Value      Amortized Cost as a
Percentage of
Shareholders’ Equity
 

Municipals

        

- General obligation

   $ 39,734       $ 40,070         37.10

- Revenue

     19,949         20,063         18.63

 

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Loans

The following table presents our composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of the dates stated:

 

     March 31, 2015     December 31, 2014  
     Amount      Percent of
Total
    Amount      Percent of
Total
 

Commercial and industrial

   $ 355,329         46.9   $ 359,243         47.9

Commercial real estate

     282,528         37.3     267,489         35.6

Residential real estate

     40,180         5.3     40,859         5.4

Consumer

     11,342         1.5     11,456         1.5

Guaranteed student loans

     67,977         9.0     71,780         9.6

Overdrafts

     44         0.0     46         0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

$ 757,400      100.0 $ 750,873      100.0

Allowance for loan and lease losses

  (6,443   (6,247
  

 

 

      

 

 

    

Total loans, net of allowance

$ 750,957    $ 744,626   
  

 

 

      

 

 

    

Loans, net of allowance for loan losses, increased $6.3 million to $751.0 million as of March 31, 2015 from $744.6 million as of December 31, 2014. As of March 31, 2015, loan balances from our participation in a mortgage warehouse lending program were $60.6 million compared to $60.0 million at December 31, 2014, while our portfolio of guaranteed student loans declined $3.8 million from December 31, 2014 to March 31, 2015. We believe balances in our guaranteed student portfolio will continue to decline at this rate throughout 2015.

The following tables provide the maturity analysis of our loans as of the dates stated based on whether loans are variable-rate or fixed-rate loans:

 

    March 31, 2015  
          Variable Rate     Fixed Rate        
                      Total                 Total        
    Within     1 to 5     After     variable     1 to 5     After     fixed     Total  
    1 year     years     5 years     > 1 year     years     5 years     > 1 year     Maturities  

Commercial and industrial (1)

  $ 181,428      $ 97,363      $ 15,769      $ 113,132      $ 48,249      $ 9,710      $ 57,959      $ 352,519   

Commercial real estate (2)

    69,371        106,908        51,073        157,981        44,372        7,412        51,784        279,136   

Residential real estate (3)

    2,202        8,394        21,600        29,994        5,091        1,302        6,393        38,589   

Consumer (4)

    8,231        128        1,183        1,311        1,781        6        1,787        11,329   

Guaranteed student loans

    23        741        67,213        67,954        —          —          —          67,977   

Overdrafts

    44        —          —          —          —          —          —          44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

$ 261,299    $ 213,534    $ 156,838    $ 370,372    $ 99,493    $ 18,430    $ 117,923    $ 749,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes $1.3 million in nonaccrual fixed-rate loans and $1.5 million in nonaccrual variable-rate loans.
(2) Excludes $2.0 million in nonaccrual fixed-rate loans and $1.4 million in nonaccrual variable-rate loans.
(3) Excludes $302 thousand in nonaccrual fixed-rate loans and $1.3 million in nonaccrual variable-rate loans.
(4) Excludes $4 thousand in nonaccrual fixed-rate loans and $8 thousand in nonaccrual variable-rate loans.

 

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Table of Contents
    December 31, 2014  
          Variable Rate     Fixed Rate        
                      Total                 Total        
    Within     1 to 5     After     variable     1 to 5     After     fixed     Total  
    1 year     years     5 years     > 1 year     years     5 years     > 1 year     Maturities  

Commercial and industrial (1)

  $ 180,100      $ 104,694      $ 15,187      $ 119,881      $ 47,184      $ 9,302      $ 56,486      $ 356,467   

Commercial real estate (2)

    70,633        101,100        46,882        147,982        42,317        3,523        45,840        264,455   

Residential real estate (3)

    3,438        7,294        22,099        29,393        5,176        1,296        6,472        39,303   

Consumer (4)

    8,753        121        938        1,059        1,627        4        1,631        11,443   

Guaranteed student loans

    28        780        70,973        71,753        —          —          —          71,781   

Overdrafts

    46        —          —          —          —          —          —          46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

$ 262,998    $ 213,989    $ 156,079    $ 370,068    $ 96,304    $ 14,125    $ 110,429    $ 743,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Excludes $1.4 million in nonaccrual fixed-rate loans and $1.4 million in nonaccrual variable-rate loans.
(2) Excludes $1.8 million in nonaccrual fixed-rate loans and $1.3 million in nonaccrual variable-rate loans.
(3) Excludes $167 thousand in nonaccrual fixed-rate loans and $1.4 million in nonaccrual variable-rate loans.
(4) Excludes $4 thousand in nonaccrual fixed-rate loans and $8 thousand in nonaccrual variable-rate loans.

A certain degree of risk is inherent in the extension of credit. Management has established loan and credit policies and guidelines designed to control both the types and amounts of risks we take and to minimize losses. Such policies and guidelines include loan underwriting parameters, loan-to-value parameters, credit monitoring guidelines, adherence to regulations, and other prudent credit practices.

Loans secured by real estate comprised 59.3% of our loan portfolio at March 31, 2015 and 57.5% at December 31, 2014. Commercial real estate (“CRE”) loans are secured by commercial properties. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. Residential real estate loans consist primarily of first and second lien loans, including home equity lines and credit loans, secured by residential real estate located primarily in our target markets, offered to select customers. These customers primarily include branch and private banking customers. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt-to-income ratios as well. The repayment of both residential and owner-occupied commercial real estate (“OORE”) loans depends primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary source of repayment. We classify OORE loans as commercial and industrial (“C&I”), as the primary source of repayment of the loan is generally dependent on the financial performance of the commercial enterprise occupying the property, with the real estate being a secondary source of repayment.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.

We determine the allowance for loan and lease losses based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that we originate in our portfolio. Qualitative factors include, but are not limited to, general economic conditions, nationally and in our target markets, threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors are estimates and may be subject to significant change. Increases to our allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in our consolidated statements of income. Loans deemed to be uncollectible, in full or in part, are charged against our allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to our allowance for loan and lease losses.

In assessing the adequacy of our allowance for loan and lease losses as of the end of a reporting period, we also evaluate our loan risk ratings. Each loan is assigned two “risk ratings” at origination. One risk rating is based on our assessment of our borrower’s financial capacity and the other is based on the type of collateral and estimated loan to value. Our assigned risk ratings generally determine the quantitative factors used in the calculation of our allowance for loan and lease losses. In addition to our assessment of risk ratings, we also consider internal observable data related to trends within the loan portfolio, such as concentrations, aging of the portfolio, changes to our policies and procedures, and external observable data such as industry and general economic trends.

 

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In evaluating loans accounted for under ASC 310-30, we periodically estimate the amount and timing of cash flows expected to be collected. Upon re-estimation, any deterioration in the timing and/or amount of cash flows results in an impairment charge, which is also reported in our provision for loan and lease losses and a component of our allowance for loan and lease losses. A subsequent improvement in the expected timing or amount of future cash flows for those loans could result in the reduction of the allowance for loan and lease losses and an increase in our net income.

In evaluating our acquired guaranteed student loans, our allowance for loan and lease losses is based on historical and expected default rates for these and similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guarantee.

Our allowance for loan and lease losses does not include amounts for loan losses on loans held pursuant to our participation in a mortgage warehouse lending program. Loans pursuant to this program are to mortgage originators that seek funding to facilitate the origination of residential mortgage loans for sale in the secondary market and are generally held for less than 30 days. We sub-participate in this lending program with a national bank (the participating bank), and neither the participating bank or we have experienced losses from this lending activity, since we began participating in this program.

Although we use various data and information sources to establish our allowance for loan and lease losses, future adjustments to our allowance for loan and lease losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to recognize additions or reductions to the allowance for loan and lease losses based on their judgments of information available to them at the time of their examination.

The following table presents the allowance for loan and losses by loan type and the percent of loans in each category to total loans as of the dates stated:

 

     March 31, 2015     December 31, 2014  
     Amount      Percent of loans in
each category to total
loans
    Amount      Percent of loans in
each category to total
loans
 

Balance at end of period applicable to:

          

Commercial and industrial

   $ 2,036         46.9   $ 2,208         47.9

Commercial real estate

     4,148         37.3     3,759         35.6

Residential real estate

     188         5.3     175         5.4

Consumer

     —           1.5     —           1.5

Guaranteed student loans

     71         9.0     105         9.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan and lease losses

$ 6,443      100.0 $ 6,247      100.0
  

 

 

      

 

 

    

 

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The following table presents the activity in the allowance for loan and lease losses for the dates stated:

 

     March 31, 2015      March 31, 2014  

Balance at beginning of period

   $ 6,247       $ 5,305   

Charge-offs:

     

Commercial and industrial

     2         —     

Commercial real estate

     —           —     

Residential real estate

     —           35   

Consumer

     —           —     

Guaranteed student loans

     321         —     

Overdrafts

     4         1   
  

 

 

    

 

 

 

Total charge-offs

  327      36   
  

 

 

    

 

 

 

Recoveries:

Commercial and industrial

  —        1   

Commercial real estate

  1      —     

Residential real estate

  —        —     

Consumer

  1      —     

Guaranteed student loans

  —        —     

Overdrafts

  2      —     
  

 

 

    

 

 

 

Total recoveries

  4      1   
  

 

 

    

 

 

 

Net charge-offs

  323      35   
  

 

 

    

 

 

 

Provision for loan and lease losses

  565      227   

Amount for unfunded commitments

  —        (19

Other (1)

  (46   (64
  

 

 

    

 

 

 

Balance at end of period

$ 6,443    $ 5,414   
  

 

 

    

 

 

 

 

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

In the third quarter of 2014, we began charging off that portion of our guaranteed student loans that is (1) not subject to federal government guarantee and (2) greater than 120 days past due and has a high probability of default. Probability of default is determined by loss migration analysis. Loans greater than 120 days past due continue to accrue interest as interest receivable is guaranteed until a claim against the guaranty, if any, is satisfied. A claim can be made when a loan is past due 270 days, or earlier in certain circumstances.

Acquired Loans

Acquired loans are initially recorded at estimated fair value as of the date of acquisition; therefore, any related allowance for loan and lease losses is not carried over or established at acquisition. The difference between contractually required amounts receivable and the acquisition date fair value of loans that are not deemed credit-impaired at acquisition is accreted (recognized) into income over the life of the loan either on a straight-line basis or based on the underlying principal payments on the loan. Any change in credit quality subsequent to acquisition for these loans is reflected in our allowance for loan and lease losses.

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC 310-30. We concluded that a portion of the loans acquired in our 2011 acquisition of substantially all the assets and assumption of certain liabilities of Virginia Business Bank and the CVB Acquisition are credit-impaired loans qualifying for accounting under ASC 310-30.

In applying ASC 310-30 to acquired loans, we must estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including estimated default rates and the amount and timing of prepayments, in addition to other factors. ASC 310-30 allows the purchaser to estimate cash flows on credit-impaired loans on a loan-by-loan basis or aggregate credit-impaired loans into one or more pools if the loans have common risk characteristics. We have estimated cash flows expected to be collected on a loan-by-loan basis.

 

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The excess of cash flows expected to be collected over the estimated fair value of purchased credit-impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the period of expected cash flows from the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference.

The following table presents our accretion activity for the periods presented. We recorded a $3.0 million estimated fair value adjustment, for credit and interest rates, on the loans acquired in the CVB Acquisition.

 

     March 31, 2015      March 31, 2014  

Balance at beginning of period

   $ 5,580       $ 4,441   

Accretion (1)

     (483      (139

Other (2)

     46         64   
  

 

 

    

 

 

 

Balance at end of period

$ 5,143    $ 4,366   
  

 

 

    

 

 

 

 

(1) Accretion amounts are reported in interest income.
(2) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

Nonperforming Assets

It is our policy to discontinue the accrual of interest income on nonperforming loans. We consider a loan as nonperforming when it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of March 31, 2015, there were no loans, other than guaranteed student loans, 90 days or greater past due with respect to principal and interest for which interest was accruing. The federal guarantee on our guaranteed student loans covers both principal and interest accrued to the date a claim, if any, is paid under the guaranty.

As of March 31, 2015 and December 31, 2014, we had $ $1.1 million in OREO. OREO valuations are evaluated periodically, and any necessary valuation allowance to carry the asset at its fair value is recorded as a charge to net income.

The following table presents our nonperforming assets and various performance ratios for the periods and as of the dates stated:

 

     March 31, 2015     December 31, 2014  

Nonaccrual loans

   $ 7,783      $ 7,377   

Other real estate owned

     1,145        1,140   
  

 

 

   

 

 

 

Total nonperforming assets

$ 8,928    $ 8,517   
  

 

 

   

 

 

 

Nonperforming assets as a percentage of total loans

  1.18   1.13

Nonperforming assets as a percentage of total assets

  0.90   0.93

Net charge-offs as a percentage of average loans

  0.04   0.33

Allowance for loan and lease losses as a percentage of total loans

  0.85   0.83

Allowance for loan and lease losses to nonaccrual loans

  82.78   84.68

Deposits

Deposits represent our primary source of funds and are comprised of demand deposits, savings deposits and time deposits. Deposits as of March 31, 2015 totaled $843.4 million compared to deposits of $772.9 million at December 31, 2014. Demand deposits, including money market accounts, as of March 31, 2015, increased $35.4 million from balances at December 31, 2014, while time deposits increased $35.1 million over this period. As of March 31, 2015, $116.6 million of our deposits were in Insured Cash Sweep (“ICS”) accounts, Certificate of Deposit Account Registry Service accounts, and brokered time deposits, which we collectively refer to as brokered deposits. As of December 31, 2014, $86.8 million of our deposits were in brokered deposits.

 

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The following table presents average balances and rates paid, by deposit category, as of the dates stated:

 

     March 31, 2015     December 31, 2014  
     Amount      Rate     Amount      Rate  

Noninterest-bearing demand deposits

   $ 129,458         —        $ 114,796         —     

Interest-bearing deposits:

          

Demand and money market

     342,712         0.72     295,344         0.61

Savings accounts

     10,212         0.28     8,357         0.25

Time deposits $100,000 or greater

     229,827         0.76     196,137         0.75

Time deposits less than $100,000

     81,987         1.01     70,866         1.14
  

 

 

      

 

 

    

Total interest-bearing deposits

  664,738      0.76   570,704      0.72
  

 

 

      

 

 

    

Total average deposits

$ 794,196      0.64 $ 685,500      0.60
  

 

 

      

 

 

    

The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of March 31, 2015:

 

     Within 3
Months
     3-6 Months      6-12 Months      Over 12
Months
     Total      Percent of Total
Deposits
 

Time deposits

   $ 60,578       $ 48,866       $ 72,778       $ 67,728       $ 249,950         29.64

Borrowings

We have one secured long-term borrowing with the FHLB in the amount of $20 million, which matures on September 28, 2015. The borrowing is a nonamortizing term loan and bears interest at a rate of 20 basis points over LIBOR, which resets quarterly. The borrowing was a modification of a then-existing borrowing, and in connection with the modification, we paid a fee of $533 thousand that is being recognized as interest expense over the remaining term of the borrowing. For the period ended March 31, 2015, our effective interest rate on the $20 million FHLB borrowing, including the effect of the prepayment fee and cash flow hedge, discussed below, was 1.84%.

At the time we modified the FHLB borrowing, we entered into a derivative (interest rate swap) whereby we pay fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without the exchange of the underlying notional amount, which is $20 million. Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. We also have forward-starting swaps with total notional amounts of $17.5 million, whereby upon the renewal of the FHLB borrowing for a specified period we pay fixed amounts and receive variable payments on a portion of the underlying notional amount of this borrowing. The derivatives are designated as a cash flow hedges, whereby the effective portion of the hedge is recorded in accumulated other comprehensive income (loss). The amounts reported in accumulated other comprehensive income (loss) as of March 31, 2015 and 2014 related to these derivatives were unrealized losses of $444 thousand (net of tax of $229 thousand) and $6 thousand (net of tax of $3 thousand), respectively. As of March 31, 2015, the ineffective portion of the derivatives was insignificant.

We have an agreement with the counterparty to our cash flow hedge derivatives that contains a provision whereby if we fail to maintain our status as a well or an adequate capitalized institution, we could be required to terminate or fully collateralize the derivative contracts. Additionally, if we default on any of our indebtedness, including default where repayment has not been accelerated by the lender, we could also be in default on our derivative obligations. We have minimum collateral requirements with our counterparty and, as of March 31, 2015, $699 thousand had been pledged as collateral under the agreement for our cash flow derivatives, as the valuation of the derivatives had surpassed the contractually specified minimum transfer amount. If we are not in compliance with the terms of the derivative agreements, we could be required to settle obligations under the agreement at termination value. As of March 31, 2015, a hedge liability of $691 thousand was recorded in other liabilities on our consolidated balance sheet related to the cash flow hedge derivatives.

We have a $12 million term loan pursuant to the Credit Agreement. Term loans under the Credit Agreement are repayable in monthly payments of accrued interest only for the first six months and then, beginning on March 31, 2015, the term loans are repayable in monthly installments of principal, based on a 10-year amortization schedule, plus accrued interest. Unless extended or earlier prepaid, the maturity date of all term loans made under the Credit Agreement is September 30, 2019, at which time all unpaid

 

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principal, with accrued interest thereon, will become due and payable in full. All borrowings under the Credit Agreement bear interest at the 30-day LIBOR in effect from time to time, plus 3.5% per annum. The Credit Agreement is unsecured; however, there is a negative pledge on all of the outstanding capital stock of the Bank. At March 31, 2015, $11.9 million was outstanding under the Credit Agreement. For the three-month period ended March 31, 2015, the effective interest rate on the unsecured senior term loan was 3.92%.

The Credit Agreement contains financial covenants that require: (1) the company to be and to cause the Bank to be “well-capitalized”, as defined in federal banking regulations, at all times, (2) the Bank’s total risk-based capital ratio to be at least equal to 11.5% as of the last day of each fiscal quarter, (3) the Bank’s ratio of nonperforming assets to tangible primary capital to be no more than 30% as of the last day of each fiscal quarter, (4) the Bank’s ratio of loan loss reserves, including loans discounts relating to acquired loans, to nonperforming loans to be at least equal to 70% at all times, and (5) the company’s fixed charge coverage ratio, determined on a consolidated basis, to be at least 1.25 to 1.0 at the end of each fiscal quarter for the trailing four fiscal quarters. As of March 31, 2015, the company and the Bank, as applicable, were in compliance with these financial covenants. The Credit Agreement also restricts the payment of dividends by the company if there exists an event of default as defined under the Credit Agreement.

We contributed a significant portion of the proceeds under the Credit Agreement to the Bank as equity, and retained the remainder of the proceeds to fund holding company obligations, including obligations under the Credit Agreement for a period of time.

LIQUIDITY AND CAPITAL RESOURCES

In the three-month period ended March 31, 2015, cash and cash equivalents increased $58.1 million compared to a decrease of $18.2 million in the same period in 2014. Net cash provided by operating activities was $3.2 million for the three-month period ended March 31, 2015 compared to net cash used in operating activities of $123 thousand for the same period in 2014. The primary source of operating funds in the 2015 period was from net income and the increase in other liabilities. Net cash used in investing activities was $15.5 million for the three-month period ended March 31, 2015 compared to net cash used in investing activities of $20.0 million for the same period in 2014. Cash used in investing activities in the 2015 period reflected net purchases of securities of $8.9 million and a net increase in loans held for investment of $6.4 million, while cash used in investing activities in the 2014 period included an increase in loans held for investment of $22.2 million. Net cash provided by financing activities in the three-month period ended March 31, 2015 was $70.4 million compared to $1.9 million for the same period of 2014. Cash provided by financing activities in both periods reflected a net increase in deposits.

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses, fund increased loan demand, and to achieve stated objectives (including working capital requirements). These events may occur daily or in other short-term intervals in the normal operation of business. Historical trends may help management predict the amount of cash required. In assessing liquidity, management gives consideration to various factors, including stability of deposits, maturity of time deposits, quality, volume and maturity of assets, sources and costs of borrowings, concentrations of loans and deposits within certain businesses and industries, competition for loans and deposits, and our overall financial condition and cash flows.

Our primary sources of liquidity are cash, due from banks, federal funds sold and securities in our available-for-sale portfolio. We have access to a credit line from our primary correspondent bank in the amount of $25.0 million. This line is for short-term liquidity needs, is subject to the prevailing federal funds interest rate, and can be terminated at any time.

In addition, we have secured borrowing facilities with the FHLB and the Federal Reserve Bank (“FRB”). The total credit availability under the FHLB facility is equal to 30% of our total assets, which as of March 31, 2015 was $274.3 million based the most recent prior quarter-end and with lendable collateral, which was $40.5 million at March 31, 2015. Under this facility, we have one non-amortizing term loan outstanding for $20.0 million. Credit availability under the FRB facility was $145.1 million as of March 31, 2015, which is also based on lendable collateral. Borrowings under this facility bear the prevailing current rate for primary credit. There were no amounts outstanding under this facility as of March 31, 2015. Pledged collateral (loans) for both the FHLB and FRB facilities, was $246.0 million, as of March 31, 2015.

We have five additional uncommitted lines of credit by national banks to borrow federal funds up to $63.0 million in total on an unsecured basis. One line for $15.0 million expires September 2015, and one line for $5.0 million expires June 2015. The remainder of the lines of credit can be cancelled at any time by the lender. As of March 31, 2015, $25 thousand was outstanding under one of these uncommitted lines of credit, as we periodically draw under these lines for liquidity testing in compliance with our contingency funding policy. Borrowings under these arrangements bear interest at the prevailing federal funds rate.

 

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Additionally, we have $3.0 million of capacity under the Credit Agreement, which may be borrowed on or before September 30, 2015, subject to customary conditions. In management’s opinion, we maintain the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs that may arise, within realistic limitations, for the foreseeable future.

Capital Adequacy

Capital management in a regulated financial services industry must properly balance return on equity to shareholders, while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Our capital management strategies have been developed to maintain our “well-capitalized” position.

We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The rule establishing a new regulatory capital framework for smaller, less complex financial institutions became effective January 1, 2015 and will be phased in over the next five years. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee and certain changes required by the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, and increases the minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

The following table presents capital and risk-weighted assets for the Bank and Xenith Bankshares as of the dates stated, including the new common equity Tier 1 capital ratio. Note that measures for the new ratio are not applicable prior to March 31, 2015.

 

     March 31, 2015      December 31, 2014  
     Xenith Bank      Xenith
Bankshares
     Xenith Bank      Xenith
Bankshares
 

Common equity Tier 1 capital

   $ 94,627       $ 85,475         N/A         N/A   

Tier 1 capital

     102,170         93,856       $ 94,980       $ 86,016   

Total risk-based capital

     108,613         100,299         101,669         92,705   

Risk-weighted assets

     834,455         835,738         781,881         782,204   

The following table presents capital ratios and minimum capital ratios required by our regulators for the Bank and Xenith Bankshares as of the dates stated, including the new common equity Tier 1 capital ratio. Note that measures for the new ratio are not applicable prior to March 31, 2015.

 

     March 31, 2015     December 31, 2014              
     Xenith Bank     Xenith
Bankshares
    Xenith Bank     Xenith
Bankshares
    Regulatory
Minimum
    Well
Capitalized
 

Common equity Tier 1 capital ratio

     11.34     10.23     N/A        N/A        4.50     > 6.50

Tier 1 leverage ratio

     11.04     10.11     10.30     9.34     4.00     > 5.00

Tier 1 risk-based capital ratio

     12.24     11.23     12.15     11.00     6.00     > 8.00

Total risk-based capital ratio

     13.02     12.00     13.00     11.85     8.00     > 10.00

Interest Rate Sensitivity

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. Our primary market risk is interest rate risk. Interest rate risk is inherent in banking, because we derive a significant amount of our operating revenue from “purchasing” funds (customer deposits and borrowings) at various terms and rates. These funds are invested in interest-earning assets (e.g., loans and investments) at various terms and rates.

 

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Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (market value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that re-price within a specific time period as a result of scheduled maturities and prepayments and contractual interest rate changes.

The balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank’s asset or liability sensitivity to optimize earnings, to minimize interest rate risk, and to preserve capital within policy limits, while optimizing the return to our shareholders.

Management strives to control the Bank’s exposure to interest rate volatility, and we operate under an asset and liability management policy approved by our board of directors. In accordance with our policy, we emphasize the loan and deposit pricing characteristics that best meet our current view on the future direction of interest rates and use sophisticated analytical tools to support our asset and liability processes.

Gap Analysis

Gap analysis tools monitor the “gap” between interest-sensitive assets and interest-sensitive liabilities. The Bank uses a simulation model to forecast balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, the Bank can position itself to mitigate risks associated with anticipated interest rate movements by understanding the dynamic nature of its balance sheet components. We evaluate our balance sheet components (securities, loan and deposit portfolios) to manage our interest rate risk position.

A negative interest-sensitive gap results when interest-sensitive liabilities exceed interest-sensitive assets for a specific re-pricing “time horizon.” The gap is positive when interest-sensitive assets exceed interest-sensitive liabilities for a given time period. For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income, and falling rates would be expected to have a negative effect. The table below reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Variable-rate loans are reflected at the earliest re-pricing interval since they re-price according to their terms. Borrowed funds are reflected in the earliest contractual re-pricing interval. Interest-bearing liabilities, with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected in expected re-pricing intervals. Time deposits and fixed-rate loans are reflected at their respective contractual maturity dates.

 

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The following table, “Gap Report,” indicates that, on a cumulative basis through the next 12 months, our interest rate-sensitive assets exceed interest rate-sensitive liabilities, resulting in an asset-sensitive position as of March 31, 2015 of $309.3 million. This net asset-sensitive position was a result of $724.2 million in interest rate-sensitive assets being available for re-pricing during the next 12 months and $414.9 million in interest rate-sensitive liabilities being available for re-pricing during the same time period. Our gap position as of March 31, 2015 is considered by management to be favorable in an increasing interest rate environment.

 

     0-180 Days      181-360 days     1-3 Years     Over 3 Years      Totals  

Assets:

            

Cash and cash due

   $ 17,174       $ —        $ —        $ —         $ 44,072   

Fed funds sold

     53,200         —          —          —           53,200   

Securities

     2,262         1,947        5,136        72,958         82,274   

Loans

     645,774         3,064        45,491        59,896         757,400   

Allowance for loan and lease losses

     —           —          —          —           (6,443

Premises and equipment

     —           —          —          —           7,943   

Intangibles

     —           —          —          —           16,029   

OREO

     —           —          —          —           1,145   

Deferred tax asset

     —           —          —          —           6,582   

BOLI

     —           —          —          —           14,204   

Other assets

     770         —          —          5,161         16,331   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

$ 719,180    $ 5,011    $ 50,627    $ 138,015    $ 992,737   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Equity:

Demand deposits

$ —      $ —      $ —      $ —      $ 150,663   

Interest-bearing deposits

  206,164      176,850      252,575      57,108      692,736   

Fed funds purchased

  25      —        —        —        25   

Borrowed funds

  31,900      —        —        —        31,900   

Other liabilities

  —        —        —        —        10,317   

Shareholders’ equity

  —        —        —        —        107,096   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities and equity

$ 238,089    $ 176,850    $ 252,575    $ 57,108    $ 992,737   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Discrete gap:

$ 481,091    $ (171,839 $ (201,948 $ 80,907   

Cumulative gap:

$ 481,091    $ 309,252    $ 107,304    $ 188,211   

Commitments and Contingencies

In the normal course of business, we have commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Additionally, we issue letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

 

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These commitments represent outstanding off-balance sheet commitments. The following table presents unfunded loan commitments outstanding as of the dates stated:

 

     March 31, 2015      December 31, 2014  

Commercial lines of credit

   $ 130,146       $ 127,363   

Commercial real estate

     63,624         63,950   

Residential real estate

     10,443         10,949   

Consumer

     3,049         2,936   

Letters of credit

     10,152         9,777   
  

 

 

    

 

 

 

Total commitments

$ 217,414    $ 214,975   
  

 

 

    

 

 

 

In addition, the Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of March 31, 2015, the Bank had invested $750 thousand. An additional $250 thousand will be funded at the request of the general partner of the partnership.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q are “forward-looking statements.” All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our plans, objectives and goals, future events or results, our competitive strengths and business strategies, and the trends in our industry are forward-looking statements. The words “believe,” “will,” “may,” “could,” “estimate,” “project,” “predict,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions, as they relate to our company, are intended to identify forward-looking statements.

Forward-looking statements made in this Form 10-Q reflect beliefs, assumptions, and expectations of future events or results, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events, circumstances or factors, not all of which are currently known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in, or implied by, the forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. You should carefully consider these matters, along with the risks discussed under “Risk Factors” in our 2014 Form 10-K and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements:

 

    general economic conditions nationally, regionally or in our target markets;

 

    the efforts of government agencies to stabilize the equity and debt markets;

 

    the adequacy of our allowance for loan and lease losses and the methodology for determining such allowance;

 

    adverse changes in our loan portfolio and credit risk-related losses and expenses;

 

    concentrations within our loan portfolio, including exposure to commercial real estate loans, and to our target markets;

 

    our dependence on our target markets in and around Virginia;

 

    reduced deposit flows and loan demand as well as increasing default rates;

 

    changes in interest rates, reducing our margins or the volumes or values of the loans we make and the deposits and investments we hold;

 

    our ability to generate sufficient taxable income to utilize our deferred tax assets, thus requiring a valuation allowance against this asset;

 

    business conditions in the financial services industry, including competitive pressures among financial services companies, new service and product offerings by competitors, and similar factors;

 

    the degree and nature of our competition, with the understanding that competitors may have greater financial resources and access to capital and may offer services that enable those competitors to compete more successfully than we can;

 

    the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

 

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    our ability and willingness to pay dividends on our common stock in the future;

 

    changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

 

    volatility of the market price of our common stock and capital markets generally;

 

    changes in our competitive strengths or business or strategies;

 

    the availability, terms and deployment of debt and equity capital;

 

    our dependence upon key personnel whose continued service is not guaranteed, and our ability to identify, hire and retain highly qualified personnel in the future;

 

    our ability to implement our business strategies successfully;

 

    disruptions to customer and employee relationships and business operations caused by the CVB Acquisition;

 

    our ability to maintain regulatory capital levels and adequate sources of funding and liquidity, which could be adversely affected by market conditions and changes in capital requirements made by regulators;

 

    negative publicity and the impact on our reputation;

 

    rapidly changing technology;

 

    failures or breaches to our systems and network security, including “hacking,” “cyber fraud” or “identity theft” resulting in operating losses or litigation;

 

    war or terrorist activities causing deterioration in the economy;

 

    other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

 

    the risks discussed in our public filings with the Securities and Exchange Commission (the “SEC”).

As a result of these factors, among others, the future events or results that are the subject of our beliefs, assumptions and expectations expressed in, or implied by, our forward-looking statements in this Form 10-Q may not be achieved in any specified time frame, or at all, which could be material. Accordingly and as noted above, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Management evaluated, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective as of the end of the period covered by this Form 10-Q to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the company’s internal control over financial reporting occurred during the fiscal quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A. Risk Factors

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. “Risk Factors” in our 2014 Form 10-K describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in the proxy statement/prospectus.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In July 2013, the company’s board of directors approved a share repurchase program under which the company may purchase in the open market or otherwise up to 210,000 shares of its outstanding common stock. There is no guarantee as to the number of shares that will be repurchased by the company, and the program can be discontinued at any time. There were no purchases during the first quarter of 2015.

Item 6. Exhibits

Exhibit Index:

 

Exhibit
Number

  

Description

  31.1    Certification of CEO pursuant to Rule 13a-14(a)
  31.2    Certification of CFO pursuant to Rule 13a-14(a)
  32.1    CEO Certification pursuant to 18 U.S.C. § 1350
  32.2    CFO Certification pursuant to 18 U.S.C. § 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    XENITH BANKSHARES, INC.
Date: May 8, 2015    

/s/    T. GAYLON LAYFIELD, III        

   

T. Gaylon Layfield, III

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 8, 2015    

/s/    THOMAS. W. OSGOOD        

    Thomas W. Osgood
    Executive Vice President, Chief Financial Officer,
    Chief Administrative Officer and Treasurer
    (Principal Financial Officer)