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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from                 to

 

Commission File No. 0-25766

 

Your Community Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

Indiana

 

35-1938254

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification Number)

 

101 W. Spring Street, New Albany, Indiana

 

47150

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code   812-944-2224

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o  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.  (Check One):

 

Large Accelerated Filer o

 

Accelerated Filer x

 

Non- Accelerated Filer o

 

Smaller Reporting Company o

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:  Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  o  Yes  o  No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  5,406,734 shares of common stock were outstanding as of November 6, 2015.

 

 

 



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

 

INDEX

 

 

 

Page

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Income

4

 

 

 

 

Consolidated Statements of Comprehensive Income

6

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity

7

 

 

 

 

Consolidated Statements of Cash Flows

8

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

51

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

66

 

 

 

Item 4.

Controls and Procedures

69

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

70

 

 

 

Item 1A.

Risk Factors

70

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

 

 

 

Item 6.

Exhibits

70

 

 

 

Signatures

 

71

 

 

 

Exhibit Index

 

72

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash and due from financial institutions

 

$

29,618

 

$

12,872

 

Interest-bearing deposits in other financial institutions

 

10,814

 

6,808

 

Deposit for partial redemption of acquiree’s preferred stock and unpaid dividend

 

 

11,341

 

Securities available for sale

 

403,486

 

202,177

 

Loans held for sale

 

20,896

 

 

Loans, net of allowance for loan losses of $6,416 and $6,465

 

986,206

 

597,110

 

Federal Home Loan Bank and Federal Reserve stock

 

3,891

 

4,964

 

Accrued interest receivable

 

5,151

 

3,152

 

Premises and equipment, net

 

30,314

 

18,124

 

Premises and equipment held for sale

 

3,898

 

 

Company owned life insurance

 

32,828

 

22,058

 

Goodwill

 

4,115

 

 

Core deposit intangible

 

5,321

 

682

 

Foreclosed and repossessed assets

 

9,028

 

4,431

 

Other assets

 

27,121

 

5,027

 

Total Assets

 

$

1,572,687

 

$

888,746

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits

 

 

 

 

 

Non interest-bearing

 

$

275,350

 

$

200,142

 

Interest-bearing

 

968,620

 

450,802

 

Total deposits

 

1,243,970

 

650,944

 

Short-term borrowings

 

74,034

 

45,818

 

Subscription agreement proceeds in escrow

 

 

20,774

 

Other borrowings

 

93,974

 

67,000

 

Accrued interest payable

 

375

 

158

 

Other liabilities

 

8,832

 

4,504

 

Total liabilities

 

1,421,185

 

789,198

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, without par value; 5,000,000 authorized; 28,000 shares issued and outstanding in 2015 and 2014; aggregate liquidation preference of $28,000

 

28,000

 

28,000

 

Common stock, $.10 par value per share; 10,000,000 shares authorized; 5,776,244 and 3,863,937 shares issued in 2015 and 2014, respectively; 5,406,734 and 3,447,826 outstanding in 2015 and 2014, respectively

 

578

 

386

 

Additional paid-in capital

 

90,459

 

44,421

 

Retained earnings

 

36,336

 

32,110

 

Accumulated other comprehensive income

 

2,489

 

1,809

 

Treasury stock, at cost (2015- 369,510 shares, 2014- 416,111 shares)

 

(6,360

)

(7,178

)

Total shareholders’ equity

 

151,502

 

99,548

 

Total Liabilities and Shareholders’ Equity

 

$

1,572,687

 

$

888,746

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands, except share data)

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

12,361

 

$

7,317

 

$

37,671

 

$

21,039

 

Taxable securities

 

1,272

 

484

 

3,932

 

1,534

 

Tax-exempt securities

 

985

 

739

 

2,609

 

2,227

 

Federal Home Loan Bank and Federal Reserve dividends

 

45

 

72

 

209

 

188

 

Interest-bearing deposits in other financial institutions

 

32

 

18

 

136

 

53

 

Total interest and dividend income

 

14,695

 

8,630

 

44,557

 

25,041

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

570

 

255

 

1,724

 

775

 

Short-term borrowings

 

40

 

19

 

85

 

72

 

Other borrowings

 

691

 

182

 

1,956

 

558

 

Total interest expense

 

1,301

 

456

 

3,765

 

1,405

 

Net interest income

 

13,394

 

8,174

 

40,792

 

23,636

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

166

 

2,261

 

638

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

13,394

 

8,008

 

38,531

 

22,998

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

1,655

 

874

 

4,715

 

2,501

 

Commission income

 

48

 

50

 

145

 

146

 

Net gain (loss) on sales of available for sale securities

 

(1

)

172

 

50

 

468

 

Mortgage banking income

 

70

 

40

 

261

 

84

 

Earnings on company owned life insurance

 

226

 

169

 

731

 

501

 

Gain on recognition of life insurance benefit

 

835

 

 

835

 

 

Interchange income

 

575

 

281

 

1,495

 

881

 

Other income

 

101

 

113

 

341

 

335

 

Total non-interest income

 

3,509

 

1,699

 

8,573

 

4,916

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,619

 

3,869

 

19,824

 

10,602

 

Occupancy

 

2,127

 

638

 

4,954

 

1,887

 

Equipment

 

513

 

333

 

1,566

 

961

 

Data processing

 

1,567

 

618

 

4,302

 

1,947

 

Marketing and advertising

 

247

 

104

 

599

 

299

 

Legal and professional service fees

 

804

 

646

 

3,215

 

1,804

 

FDIC insurance premiums

 

249

 

156

 

895

 

449

 

Amortization of intangible assets

 

312

 

80

 

1,027

 

244

 

Foreclosed assets, net

 

119

 

(148

)

368

 

43

 

Other expense

 

1,095

 

561

 

4,301

 

1,701

 

Total non-interest expense

 

12,652

 

6,857

 

41,051

 

19,937

 

Income before income taxes

 

4,251

 

2,850

 

6,053

 

7,977

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

334

 

534

 

(493

)

1,401

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,917

 

2,316

 

6,546

 

6,576

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

(110

)

(110

)

(329

)

(329

)

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

3,807

 

$

2,206

 

$

6,217

 

$

6,247

 

 

4



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands, except share data)

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

$

0.64

 

$

1.15

 

$

1.82

 

Diluted

 

$

0.70

 

$

0.63

 

$

1.14

 

$

1.80

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.12

 

$

0.12

 

$

0.36

 

$

0.36

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

Net income

 

$

3,917

 

$

2,316

 

$

6,546

 

$

6,576

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Unrealized gain on securities:

 

 

 

 

 

 

 

 

 

Unrealized gain arising during the period

 

3,636

 

622

 

1,175

 

4,667

 

Reclassification adjustment for (gains) losses included in net income

 

1

 

(172

)

(50

)

(468

)

Net unrealized gains

 

3,637

 

450

 

1,125

 

4,199

 

Tax effect

 

(1,239

)

(151

)

(384

)

(1,417

)

Net of tax

 

2,398

 

299

 

741

 

2,782

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Net loss arising during the period

 

(89

)

(27

)

(92

)

(21

)

Tax effect

 

30

 

9

 

31

 

7

 

Net of tax

 

(59

)

(18

)

(61

)

(14

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

2,339

 

281

 

680

 

2,768

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

6,256

 

$

2,597

 

$

7,226

 

$

9,344

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

 

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

Balance, January 1, 2015

 

$

28,000

 

$

386

 

$

44,421

 

$

32,110

 

$

1,809

 

$

(7,178

)

$

99,548

 

Net income

 

 

 

 

6,546

 

 

 

6,546

 

Other comprehensive income

 

 

 

 

 

680

 

 

680

 

Assumption of First Financial Service Corporation’s preferred stock

 

12,309

 

 

 

 

 

 

12,309

 

Redemption of preferred stock

 

(12,309

)

 

 

 

 

 

(12,309

)

Issuance of common shares for acquisition of First Financial Service Corporation

 

 

80

 

21,446

 

 

 

 

21,526

 

Issuance of common shares, net of issuance costs

 

 

112

 

23,656

 

 

 

 

23,768

 

Dividends declared on common stock ($0.36 per share)

 

 

 

 

(1,991

)

 

 

(1,991

)

Dividends on preferred stock

 

 

 

 

(329

)

 

 

(329

)

Issuance of treasury stock under dividend reinvestment plan

 

 

 

57

 

 

 

91

 

148

 

Issuance of stock award shares

 

 

 

(384

)

 

 

273

 

(111

)

Stock options exercised

 

 

 

119

 

 

 

454

 

573

 

Stock award expense

 

 

 

1,084

 

 

 

 

1,084

 

Tax benefit from vesting of stock award shares

 

 

 

60

 

 

 

 

60

 

Balance, September 30, 2015

 

$

28,000

 

$

578

 

$

90,459

 

$

36,336

 

$

2,489

 

$

(6,360

)

$

151,502

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

PART I - FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

6,546

 

$

6,576

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

2,261

 

638

 

Depreciation and amortization

 

331

 

1,319

 

Net amortization of securities

 

1,510

 

358

 

Net gain on sales of available for sale securities

 

(50

)

(468

)

Mortgage loans originated for sale

 

(24,345

)

(3,186

)

Proceeds from mortgage loan sales

 

26,153

 

3,333

 

Net gain on sales of mortgage loans

 

(257

)

(79

)

Earnings on company owned life insurance

 

(731

)

(501

)

Gain on recognition of life insurance benefit

 

(835

)

 

Stock award compensation expense

 

1,084

 

303

 

Net (gain) loss on disposition of premises and equipment

 

(171

)

3

 

Net (gain) loss on disposition of foreclosed and repossessed assets

 

35

 

(335

)

Net change in:

 

 

 

 

 

Accrued interest receivable

 

(360

)

121

 

Accrued interest payable

 

(688

)

(19

)

Other assets

 

(312

)

(212

)

Other liabilities

 

(4,791

)

3,097

 

Net cash from operating activities

 

5,380

 

10,948

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of First Financial Service Corporation, net

 

12,979

 

 

Net change in interest-bearing deposits

 

59,991

 

5,241

 

Available for sale securities:

 

 

 

 

 

Sales

 

38,877

 

43,746

 

Purchases

 

(58,936

)

(46,979

)

Maturities, prepayments and calls

 

41,993

 

11,738

 

Loan originations and payments, net

 

(10,633

)

(33,072

)

Proceeds from the sale of foreclosed and repossessed assets

 

10,331

 

1,935

 

Proceeds from life insurance benefit

 

1,581

 

 

Purchases of premises and equipment

 

(1,137

)

(738

)

Proceeds from the sale of premises and equipment

 

184

 

 

Additions to foreclosed and repossessed assets

 

 

(37

)

Redemption of Federal Reserve and FHLB Stock

 

5,674

 

 

Purchase of Federal Reserve and FHLB stock

 

(521

)

(9

)

Net cash from investing activities

 

100,383

 

(18,175

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net change in deposits

 

(110,309

)

11,586

 

Net change in short-term borrowings

 

28,216

 

(8,652

)

Proceeds from issuance of other borrowings

 

75,000

 

160,000

 

Repayment of other borrowings

 

(76,506

)

(155,000

)

Taxes paid on stock award shares for employees

 

(111

)

(267

)

Proceeds from stock options exercised

 

573

 

 

Issuance costs paid for common shares issued

 

(1,263

)

 

Redemption of acquired preferred shares and dividends

 

(2,445

)

 

Issuance of treasury stock, stock awards

 

 

68

 

Cash dividends paid on preferred shares

 

(329

)

(291

)

Cash dividends paid on common shares

 

(1,843

)

(1,070

)

Net cash from financing activities

 

(89,017

)

6,374

 

Net change in cash and due from financial institutions

 

16,746

 

(853

)

Cash and due from financial institutions at beginning of period

 

12,872

 

15,393

 

Cash and due from financial institutions at end of period

 

$

29,618

 

$

14,540

 

 

8



Table of Contents

 

PART I — FINANCIAL INFORMATION

YOUR COMMUNITY BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

3,232

 

$

1,424

 

Income taxes paid, net of refunds

 

 

675

 

 

 

 

 

 

 

Supplemental noncash disclosures:

 

 

 

 

 

Transfer from loans to foreclosed and repossessed assets

 

12,542

 

1,468

 

Issuance of treasury shares under dividend reinvestment plan

 

91

 

116

 

Issuance of treasury shares for net settlement of stock options

 

63

 

29

 

Transfer of loans, net to loans held for sale

 

20,673

 

 

Sale and financing of foreclosed and repossessed assets

 

762

 

1,216

 

Sale and financing of premises and equipment held for sale

 

1,757

 

 

Issuance of common shares

 

25,031

 

 

Redemption of preferred shares and unpaid dividends of First Financial Service Corporation

 

18,043

 

 

Declared, unpaid dividends on preferred stock

 

110

 

110

 

 

See accompanying notes to consolidated financial statements.

 

9



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Presentation of Interim Information

 

Your Community Bankshares, Inc. (“we,” “our”, “us”, or “the Company”) is a bank holding company headquartered in New Albany, Indiana. Our wholly-owned banking subsidiary is Your Community Bank (“Your Community Bank” or “YCB.  YCB (at times referred to herein as the “Bank”) is a state-chartered commercial bank headquartered in New Albany, Indiana regulated by the Indiana Department of Financial Institutions.  Your Community Bank is also regulated by the Federal Deposit Insurance Corporation and (with respect to its Kentucky branches) the Kentucky Office of Financial Institutions.  The Company formed a captive insurance company in 2012, CBIN Insurance, Inc., which issues policies to the Company’s subsidiaries to cover gaps in coverage and other risks not insured by its third-party provider.

 

Your Community Bank has three wholly-owned subsidiaries to manage its investment portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are Nevada corporations which jointly own CBSI Investment Portfolio Management, LLC, a Nevada limited liability corporation which holds and manages investment securities previously owned by Your Community Bank.

 

In June 2004 and June 2006, we completed placements of floating rate subordinated debentures through two trusts that we formed, Community Bank Shares (IN) Statutory Trust I and Trust II (“Trusts”).  Because the Trusts are not consolidated with us, our financial statements reflect the subordinated debt we issued to the Trusts.

 

To prepare financial statements in conformity with U.S. generally accepted accounting principles management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 2015, the results of operations for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014.  All of these adjustments are of a normal, recurring nature.  Interim results are not necessarily indicative of results for a full year.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions for Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2014.  The consolidated financial statements include our accounts and our subsidiaries’ accounts.  All material intercompany balances and transactions have been eliminated in consolidation.

 

Reclassifications:  Some items in the prior period financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior period net income or shareholders’ equity.

 

10



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.  Acquisition

 

On January 1, 2015, the Company acquired First Financial Service Corporation (“FFKY”) and its wholly-owned subsidiary, First Federal Savings Bank of Elizabethtown (“FFSB”).  FFKY was headquartered in Elizabethtown, Kentucky with $774.1 million in total assets and operated 17 financial centers.  The acquisition expanded the Company’s presence into central Kentucky with minimal overlap of its existing market footprint.

 

The total purchase price for FFKY was $21.9 million, consisting of $423,000 of cash and the issuance of 791,357 shares of the Company’s common stock valued at $21.5 million.  The acquisition was accounted for under the acquisition method of accounting.  Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $3.0 million of transaction and integration costs associated with the acquisition were expensed as incurred.  Based on the initial preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, $7.5 million of the purchase price was allocated to goodwill which is not considered deductible for tax purposes.

 

During the quarters ended June 30, 2015 and September 30, 2015, management obtained information regarding the initial valuations of certain assets which were adjusted to reflect the revised estimated fair value resulting in adjusted goodwill of $4.1 million.  The valuations of loans and premises and equipment are still preliminary and subject to change.  Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the FFKY acquisition is allocated as follows (in thousands):

 

 

 

As Previously
Reported

 

Second Quarter
2015 Recast
Adjustments

 

Third Quarter
2015 Recast
Adjustments

 

As Recast

 

Cash and cash equivalents

 

$

13,401

 

$

 

$

 

$

13,401

 

Interest-bearing deposits in other financial institutions

 

63,997

 

 

 

63,997

 

Securities available for sale

 

223,579

 

 

 

223,579

 

Loans held for sale

 

1,774

 

 

 

1,774

 

Loans

 

402,259

 

1,802

 

4,983

 

409,044

 

Federal Home Loan Bank Stock

 

4,080

 

 

 

4,080

 

Accrued interest receivable

 

1,639

 

 

 

1,639

 

Premises and equipment

 

20,216

 

(500

)

319

 

20,035

 

Company owned life insurance

 

10,785

 

 

 

10,785

 

Foreclosed and repossessed assets

 

3,228

 

127

 

(17

)

3,338

 

Core deposit intangible

 

5,667

 

 

 

5,667

 

Deferred tax assets

 

15,290

 

(260

)

(1,288

)

13,742

 

Other assets

 

7,786

 

 

 

7,786

 

Total assets acquired

 

773,701

 

1,169

 

3,997

 

778,867

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

704,784

 

 

 

704,784

 

Other borrowings

 

26,489

 

 

1,737

 

28,226

 

Accrued interest payable

 

6,639

 

 

 

6,639

 

Other liabilities

 

9,076

 

 

 

9,076

 

Total liabilities assumed

 

746,988

 

 

1,737

 

748,725

 

 

 

 

 

 

 

 

 

 

 

Liquidation amount of preferred stock

 

12,309

 

 

 

12,309

 

 

 

 

 

 

 

 

 

 

 

Total identifiable net assets

 

14,404

 

1,169

 

2,260

 

17,833

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

7,544

 

(1,169

)

(2,260

)

4,115

 

 

 

 

 

 

 

 

 

 

 

 

 

$

21,948

 

 

 

 

 

$

21,948

 

 

11



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.  Acquisition (Continued)

 

The following table presents unaudited pro-forma information below for the three and nine month periods ended September 30, 2015 and 2014 and gives effect to the FFKY acquisition as if it had occurred on January 1, 2014.  The pro-forma financial information is not necessarily indicative of the results of operations had the acquisition occurred as of that date.  The 2015 pro-forma information was adjusted to exclude acquisition-related costs incurred during the period while 2014 was adjusted to include the costs.  Additionally, adjustments were made for interest income on loans and securities, interest expense on deposits and other borrowings assumed, amortization of intangibles arising from the transaction, and the related income tax effects.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

12,991

 

$

14,275

 

$

39,899

 

$

42,963

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,662

 

$

3,373

 

$

8,434

 

$

4,276

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

3,552

 

$

2,813

 

$

8,105

 

$

2,617

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.66

 

$

0.52

 

$

1.50

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.65

 

$

0.51

 

$

1.49

 

$

0.48

 

 

12



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Securities

 

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

(In thousands)

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

118,724

 

$

4,412

 

$

(408

)

$

122,728

 

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

243,888

 

1,583

 

(1,135

)

244,336

 

U.S. Government sponsored entities and agencies

 

32,668

 

252

 

(72

)

32,848

 

Corporate

 

3,376

 

 

(51

)

3,325

 

Mutual funds

 

250

 

 

(1

)

249

 

Total securities available for sale

 

$

398,906

 

$

6,247

 

$

(1,667

)

$

403,486

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

80,623

 

$

5,002

 

$

(174

)

$

85,451

 

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

108,377

 

690

 

(1,750

)

107,317

 

U.S. Government sponsored entities and agencies

 

9,472

 

8

 

(319

)

9,161

 

Mutual funds

 

250

 

 

(2

)

248

 

Total securities available for sale

 

$

198,722

 

$

5,700

 

$

(2,245

)

$

202,177

 

 

Sales of available for sale securities were as follows.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Proceeds

 

$

 

$

10,989

 

$

38,877

 

$

43,746

 

Gross gains

 

 

172

 

366

 

511

 

Gross losses

 

(1

)

 

(316

)

(43

)

 

The tax provision applicable to these net realized gains amounted to $0 and $17,000 for the three and nine months ended September 30, 2015, respectively, and $58,000 and $159,000 for the three and nine months ended September 30, 2014, respectively.

 

13



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YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Securities (Continued)

 

The amortized cost and fair value of the contractual maturities of available for sale securities at September 30, 2015 were as follows.  Mortgage-backed agencies and mutual funds which do not have a single maturity date are shown separately.

 

 

 

September 30, 2015

 

 

 

Amortized Cost

 

Fair Value

 

 

 

(In thousands)

 

Within one year

 

$

986

 

$

996

 

One to five years

 

14,247

 

14,469

 

Five to ten years

 

49,667

 

51,605

 

Beyond ten years

 

89,868

 

91,831

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

243,888

 

244,336

 

Mutual funds

 

250

 

249

 

Total

 

$

398,906

 

$

403,486

 

 

Securities pledged at September 30, 2015 and December 31, 2014 had a carrying amount of $214.2 million and $54.8 million to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances.

 

Securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

September 30, 2015

 

 

 

State and municipal

 

$

28,176

 

$

(309

)

$

2,984

 

$

(99

)

$

31,160

 

$

(408

)

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

26,452

 

(107

)

47,810

 

(1,028

)

74,262

 

(1,135

)

U.S. Government sponsored entities and agencies

 

 

 

8,944

 

(72

)

8,944

 

(72

)

Corporate

 

3,325

 

(51

)

 

 

3,325

 

(51

)

Mutual Funds

 

249

 

(1

)

 

 

249

 

(1

)

Total temporarily impaired

 

$

58,202

 

$

(468

)

$

59,738

 

$

(1,199

)

$

117,940

 

$

(1,667

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

1,715

 

$

(8

)

$

6,786

 

$

(166

)

$

8,501

 

$

(174

)

Residential mortgaged-backed securities issued by U.S. Government sponsored agencies

 

3,443

 

(20

)

55,224

 

(1,730

)

58,667

 

(1,750

)

U.S. Government sponsored entities and agencies

 

 

 

8,699

 

(319

)

8,699

 

(319

)

Mutual funds

 

 

 

248

 

(2

)

248

 

(2

)

Total temporarily impaired

 

$

5,158

 

$

(28

)

$

70,957

 

$

(2,217

)

$

76,115

 

$

(2,245

)

 

14



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Securities (Continued)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under FASB ASC 320-10.

 

In determining OTTI under the FASB ASC 320-10 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

As of September 30, 2015, the Company’s security portfolio consisted of 408 securities, 97 of which were in an unrealized loss position. The unrealized losses are related to the Company’s state and municipal, residential mortgage-backed securities issued by U.S. Government sponsored entities and agencies, and U.S. Government sponsored entities and agencies, as discussed below.

 

State and Municipal

 

At September 30, 2015 the Company had approximately $31.2 million of state and municipal securities with an unrealized loss of $408,000.  Of the 279 state and municipal securities in the Company’s portfolio, 277 had an investment grade rating as of September 30, 2015 while two were not rated.  The decline in value in these securities is attributable to interest rate and liquidity, and not credit quality.  All of the state and municipal securities in the Company’s portfolio have a fair value as a percentage of amortized cost greater than 90%.  The Company does not have the intent to sell its state and municipal securities and it is unlikely that we will be required to sell the securities before the anticipated recovery.  The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

 

Residential mortgage-backed Securities issued by U.S. Government sponsored entities

 

At September 30, 2015, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

 

15



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

U.S. Government sponsored entities and agencies

 

At September 30, 2015, the unrealized losses in the Company’s U.S. Government sponsored entities and agencies securities portfolio were attributed to changes in interest rates and liquidity, and not due to credit quality.  Because the company does not have the intent to sell these securities and it is not likely that they will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired as of September 30, 2015.

 

4.   Loans

 

Loans at September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands)

 

Commercial

 

$

170,645

 

$

123,727

 

Construction

 

80,871

 

42,848

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/residential

 

153,741

 

112,405

 

Other nonfarm/residential

 

190,284

 

100,632

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

301,108

 

183,837

 

Home equity

 

75,169

 

34,850

 

Consumer

 

20,804

 

5,276

 

Subtotal

 

992,622

 

603,575

 

Less:

 

 

 

 

 

Allowance for loan losses

 

(6,416

)

(6,465

)

Loans, net

 

$

986,206

 

$

597,110

 

 

During 2015 and 2014, substantially all of the Company’s residential and commercial real estate loans were pledged as collateral to the Federal Home Loan Bank to secure advances.

 

As discussed under Footnote 2 “Acquisition”, the above loan balances and loans held for sale include loans purchased in the First Financial Service Corporation acquisition.  The composition of loans acquired as of September 30, 2015 is as follows:

 

 

 

September 30,
2015

 

 

 

(In thousands)

 

Commercial

 

$

17,192

 

Construction

 

24,061

 

Commercial real estate:

 

 

 

Owner occupied nonfarm/residential

 

41,441

 

Other nonfarm/residential

 

74,156

 

Residential real estate:

 

 

 

Secured by first liens

 

114,338

 

Home equity

 

38,074

 

Consumer

 

11,345

 

Total Loans

 

$

320,607

 

 

16



Table of Contents

 

Of the total loans acquired from First Financial Service Corporation in the table above, $11.5 million were classified as held for sale as of September 30, 2015.

 

17



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date.  The fair value adjustments were determined using discounted contractual cash flows.  However, the Company believes that all contractual cash flows related to these financial instruments will be collected.  As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.  Receivables acquired that were not subject to these requirements include non-impaired loans with a fair value and gross contractual amounts receivable of $339.0 million and $343.4 million as of the date of acquisition.

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows:

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands)

 

Commercial

 

$

599

 

$

113

 

Construction

 

2,489

 

35

 

Commercial Real Estate

 

31,640

 

3,124

 

Residential Real Estate

 

13,201

 

4,890

 

Consumer

 

10

 

 

Carrying amount

 

$

47,939

 

$

8,162

 

 

The associated allowance for loan losses as of September 30, 2015 or December 31, 2014 for purchased credit impaired loans was $163,000 and $0, respectively.  As of September 30, 2015, $11.5 million of the Company’s purchased credit impaired loans included in the table above were classified as loans held for sale.

 

At the acquisition date, the cash flows expected to be collected and the fair value for purchased credit impaired loans were $73.0 million and $71.4 million, respectively.

 

Accretable yield, or income expected to be collected, is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Balance, beginning of period

 

$

1,449

 

$

876

 

$

306

 

$

545

 

New loans purchased

 

 

 

1,632

 

 

Accretion of income

 

(269

)

(85

)

(1,072

)

(147

)

Reclassifications from nonaccretable difference

 

200

 

 

514

 

419

 

Disposals

 

 

 

 

(26

)

Balance, end of period

 

$

1,380

 

$

791

 

$

1,380

 

$

791

 

 

18



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2015 and 2014 (in thousands):

 

Three Months Ended September 30, 2015:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,841

 

$

2,212

 

$

1,284

 

$

2,567

 

$

141

 

$

8,045

 

Provision for loan losses

 

(9

)

236

 

90

 

(475

)

158

 

 

Loans charged-off

 

(501

)

(560

)

(47

)

(626

)

(141

)

(1,875

)

Recoveries

 

53

 

 

45

 

98

 

50

 

246

 

Ending balance

 

$

1,384

 

$

1,888

 

$

1,372

 

$

1,564

 

$

208

 

$

6,416

 

 

Three Months Ended September 30, 2014:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,788

 

$

2,441

 

$

1,378

 

$

2,800

 

$

74

 

$

8,481

 

Provision for loan losses

 

266

 

(129

)

92

 

(57

)

(6

)

166

 

Loans charged-off

 

(528

)

(150

)

 

(260

)

(46

)

(984

)

Recoveries

 

85

 

 

11

 

7

 

18

 

121

 

Ending balance

 

$

1,611

 

$

2,162

 

$

1,481

 

$

2,490

 

$

40

 

$

7,784

 

 

Loan charge-offs of $1.0 million and $0 are included in the charge-off activity above for the three months ended September 30, 2015 and 2014, respectively, related to the transfer of loans to loans held for sale.

 

19



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015 and 2014 (in thousands):

 

Nine Months Ended September 30, 2015:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

970

 

$

1,992

 

$

1,268

 

$

2,133

 

$

102

 

$

6,465

 

Provision for loan losses

 

2,731

 

(33

)

(742

)

134

 

171

 

2,261

 

Loans charged-off

 

(2,411

)

(592

)

(48

)

(878

)

(292

)

(4,221

)

Recoveries

 

94

 

521

 

894

 

175

 

227

 

1,911

 

Ending balance

 

$

1,384

 

$

1,888

 

$

1,372

 

$

1,564

 

$

208

 

$

6,416

 

 

Nine Months Ended September 30, 2014:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,757

 

$

2,210

 

$

1,565

 

$

2,383

 

$

94

 

$

8,009

 

Provision for loan losses

 

208

 

35

 

(167

)

530

 

32

 

638

 

Loans charged-off

 

(529

)

(150

)

(23

)

(446

)

(157

)

(1,305

)

Recoveries

 

175

 

67

 

106

 

23

 

71

 

442

 

Ending balance

 

$

1,611

 

$

2,162

 

$

1,481

 

$

2,490

 

$

40

 

$

7,784

 

 

Loan charge-offs of $1.0 million and $0 are included in the charge-off activity above for the nine months ended September 30, 2015 and 2014, respectively, related to the transfer of loans to loans held for sale.

 

20



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

18

 

$

412

 

$

 

$

479

 

$

 

$

909

 

Collectively evaluated for impairment

 

1,366

 

1,442

 

1,305

 

1,023

 

208

 

5,344

 

Acquired with deteriorated credit quality

 

 

34

 

67

 

62

 

 

163

 

Total ending allowance balance

 

$

1,384

 

$

1,888

 

$

1,372

 

$

1,564

 

$

208

 

$

6,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

18

 

$

2,602

 

$

873

 

$

3,410

 

$

 

$

6,903

 

Loans collectively evaluated for impairment

 

170,097

 

75,780

 

322,250

 

360,407

 

20,794

 

949,328

 

Loans acquired with deteriorated credit quality

 

530

 

2,489

 

20,902

 

12,460

 

10

 

36,391

 

Total ending loans balance

 

$

170,645

 

$

80,871

 

$

344,025

 

$

376,277

 

$

20,804

 

$

992,622

 

 

December 31, 2014:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

65

 

$

790

 

$

72

 

$

736

 

$

9

 

$

1,672

 

Collectively evaluated for impairment

 

905

 

1,202

 

1,196

 

1,397

 

93

 

4,793

 

Acquired with deteriorated credit quality

 

 

 

 

 

 

 

Total ending allowance balance

 

$

970

 

$

1,992

 

$

1,268

 

$

2,133

 

$

102

 

$

6,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

4,251

 

$

6,105

 

$

1,822

 

$

4,459

 

$

10

 

$

16,647

 

Loans collectively evaluated for impairment

 

119,363

 

36,708

 

208,091

 

209,338

 

5,266

 

578,766

 

Loans acquired with deteriorated credit quality

 

113

 

35

 

3,124

 

4,890

 

 

8,162

 

Total ending loans balance

 

$

123,727

 

$

42,848

 

$

213,037

 

$

218,687

 

$

5,276

 

$

603,575

 

 

At September 30, 2015, the Company reclassified loans with a carrying amount of $20.7 million to loans held for sale.  Previously, $9.2 million of the loans reclassified were individually evaluated for impairment while $11.5 million were acquired with deteriorated credit quality.

 

21



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the nine month period ending September 30, 2015 (in thousands):

 

September 30, 2015:

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

2,818

 

$

4

 

Construction

 

978

 

713

 

 

2,541

 

24

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

599

 

31

 

Other nonfarm/nonresidential

 

873

 

873

 

 

801

 

20

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

912

 

912

 

 

1,792

 

9

 

Home equity

 

 

 

 

29

 

 

Consumer

 

 

 

 

1

 

 

Total

 

$

2,763

 

$

2,498

 

$

 

$

8,581

 

$

88

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

18

 

$

18

 

$

18

 

$

405

 

$

1

 

Construction

 

1,889

 

1,889

 

412

 

3,263

 

78

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

155

 

4

 

Other nonfarm/nonresidential

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,869

 

1,869

 

265

 

2,061

 

58

 

Home equity

 

629

 

629

 

214

 

711

 

22

 

Consumer

 

 

 

 

7

 

 

Total

 

$

4,405

 

$

4,405

 

$

909

 

$

6,602

 

$

163

 

 

22



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014:

 

December 31, 2014:

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

4,409

 

$

4,138

 

$

 

Construction

 

5,458

 

2,357

 

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

742

 

742

 

 

Other nonfarm/nonresidential

 

900

 

900

 

 

Residential real estate:

 

 

 

 

 

 

 

Secured by first liens

 

1,877

 

1,800

 

 

Home equity

 

62

 

14

 

 

Consumer

 

1

 

1

 

 

Total

 

$

13,449

 

$

9,952

 

$

 

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

 

 

(In thousands)

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

113

 

$

113

 

$

65

 

Construction

 

3,748

 

3,748

 

790

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

180

 

180

 

72

 

Other nonfarm/nonresidential

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Secured by first liens

 

1,983

 

1,905

 

519

 

Home equity

 

740

 

740

 

217

 

Consumer

 

9

 

9

 

9

 

Total

 

$

6,773

 

$

6,695

 

$

1,672

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.  For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.

 

23



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the information related to loans individually evaluated for impairment by class of loans for the three month period ending September 30, 2015:

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

Commercial

 

$

1,375

 

$

 

Construction

 

1,180

 

8

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

507

 

5

 

Other nonfarm/nonresidential

 

706

 

7

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

1,409

 

 

Home equity

 

51

 

 

Consumer

 

 

 

Total

 

$

5,228

 

$

20

 

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With an allowance recorded:

 

 

 

 

 

Commercial

 

$

706

 

$

1

 

Construction

 

2,783

 

11

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

109

 

 

Other nonfarm/nonresidential

 

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

2,386

 

25

 

Home equity

 

683

 

6

 

Consumer

 

4

 

 

Total

 

$

6,671

 

$

43

 

 

24



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents information related to loans individually evaluated for impairment by class of loans for the three and nine month periods ending September 30, 2014:

 

 

 

Three Months

 

Nine Months

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,821

 

$

 

$

1,986

 

$

23

 

Construction

 

2,621

 

20

 

2,448

 

35

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

915

 

11

 

835

 

35

 

Other nonfarm/nonresidential

 

2,063

 

12

 

1,611

 

17

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,400

 

8

 

2,352

 

14

 

Home equity

 

263

 

1

 

376

 

3

 

Consumer

 

4

 

 

9

 

 

Total

 

$

11,087

 

$

52

 

$

9,617

 

$

127

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,094

 

$

 

$

3,043

 

$

1

 

Construction

 

4,378

 

35

 

4,612

 

117

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

181

 

2

 

184

 

7

 

Other nonfarm/nonresidential

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,151

 

20

 

2,042

 

52

 

Home equity

 

865

 

9

 

914

 

31

 

Consumer

 

16

 

 

22

 

 

Total

 

$

10,685

 

$

66

 

$

10,817

 

$

208

 

 

25



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2015 and December 31, 2014:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Nonaccrual

 

Loans Past
Due Over 90
Days Still
Accruing

 

Nonaccrual

 

Loans Past
Due Over 90
Days Still
Accruing

 

 

 

(In thousands)

 

Commercial

 

$

22

 

$

 

$

3,917

 

$

 

Construction

 

2

 

 

2,045

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

88

 

 

90

 

 

Other nonfarm/nonresidential

 

1,070

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

3,064

 

 

1,218

 

 

Home equity

 

215

 

 

184

 

 

Consumer

 

25

 

 

81

 

 

Total

 

$

4,486

 

$

 

$

7,535

 

$

 

Loans excluded from table above classified as Loans Held for Sale

 

$

4,950

 

$

 

$

 

$

 

 

Of the loans on non-accrual status included in the table above as of September 30, 2015, $2.0 million were acquired from First Financial Service Corporation.

 

26



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans:

 

 

 

30 — 59
Days
Past
Due

 

60 — 89
Days
Past
Due

 

Greater
than 89
Days
Past Due

 

Total
Past
Due

 

Loans Not
Past Due

 

Loans Past
Due Over 90
Days Still
Accruing

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

155

 

$

22

 

$

22

 

$

199

 

$

170,446

 

$

 

Construction

 

41

 

100

 

2

 

143

 

80,728

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

425

 

57

 

88

 

570

 

153,171

 

 

Other nonfarm/nonresidential

 

 

1

 

1,070

 

1,071

 

189,213

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,087

 

2,696

 

2,856

 

6,639

 

294,469

 

 

Home equity

 

509

 

240

 

203

 

952

 

74,217

 

 

Consumer

 

208

 

91

 

25

 

324

 

20,480

 

 

Total

 

$

2,425

 

$

3,207

 

$

4,266

 

$

9,898

 

$

982,724

 

$

 

Loans included in totals above acquired from First Financial Service Corporation

 

$

693

 

$

2,021

 

$

2,027

 

$

4,741

 

$

315,866

 

$

 

Loans excluded from totals above classified as Loans Held For Sale

 

$

204

 

$

 

$

4,914

 

$

5,118

 

$

16,804

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

179

 

$

13

 

$

3,917

 

$

4,109

 

$

119,618

 

$

 

Construction

 

62

 

 

2,045

 

2,107

 

40,741

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

90

 

90

 

112,315

 

 

Other nonfarm/nonresidential

 

 

 

 

 

100,632

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,817

 

1,171

 

1,218

 

5,206

 

178,631

 

 

Home equity

 

342

 

12

 

184

 

538

 

34,312

 

 

Consumer

 

16

 

 

81

 

97

 

5,179

 

 

Total

 

$

3,416

 

$

1,196

 

$

7,535

 

$

12,147

 

$

591,428

 

$

 

 

27



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

Troubled Debt Restructurings:

 

Troubled debt restructurings totaled $10.9 million and $11.9 million at September 30, 2015 and at December 31, 2014.  Of the total TDRs outstanding at September 30, 2015, $4.9 million were acquired from First Financial Service Corporation that have been modified by the Company subsequent to acquisition.   There were $233,000 and $4.1 million TDRs on non-accrual as of September 30, 2015 and December 31, 2014.  The Company did not have any commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of September 30, 2015 and December 31, 2014.  As of September 30, 2015, $5.0 million of loans previously classified as TDRs were transferred to loans held for sale.  Of the total previously classified TDRs transferred to loans held for sale, $2.6 million were on non-accrual as of September 30, 2015.

 

The detail of outstanding TDRs by class and modification type as of September 30, 2015 and December 31, 2014 follows (in thousands):

 

September 30, 2015:

 

 

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

Commercial:

 

 

 

 

 

Multiple modifications

 

$

46

 

$

18

 

Construction:

 

 

 

 

 

Extended maturity

 

98

 

 

Multiple modifications

 

2,504

 

412

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

Interest only payments

 

171

 

 

Other nonfarm/nonresidential

 

 

 

 

 

Extended maturity

 

3,148

 

23

 

Multiple modifications

 

984

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

 

 

 

 

Interest rate reduction

 

318

 

135

 

Extended maturity

 

2,013

 

47

 

Multiple modifications

 

1,006

 

52

 

Home equity

 

 

 

 

 

Multiple modifications

 

629

 

214

 

Total

 

$

10,917

 

$

901

 

 

28



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

December 31, 2014:

 

 

 

Recorded
Investment

 

Allowance
for Loan
Losses
Allocated

 

 

 

(In thousands)

 

Commercial:

 

 

 

 

 

Extended maturity

 

$

3,902

 

$

 

Multiple modifications

 

18

 

 

Construction:

 

 

 

 

 

Interest rate reduction

 

1,386

 

180

 

Extended maturity

 

115

 

 

Interest only payments

 

556

 

 

Multiple modifications

 

2,559

 

393

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

Interest only payments

 

180

 

72

 

Other nonfarm/nonresidential

 

 

 

 

 

Extended maturity

 

551

 

 

Multiple modifications

 

348

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

 

 

 

 

Interest rate reduction

 

907

 

140

 

Extended maturity

 

477

 

44

 

Multiple modifications

 

250

 

30

 

Home equity

 

 

 

 

 

Multiple modifications

 

648

 

209

 

Total

 

$

11,897

 

$

1,068

 

 

29



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

A loan is considered in payment default once it is 30 days contractually past due under the modified terms.  The following table summarizes the Company’s TDR’s by class, modification type and performance as of September 30, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015:

 

 

 

TDRs Greater than
30 Days Past Due
and
Still Accruing

 

TDRs on
Nonaccrual

 

Total TDRs
Not
Performing to
Modified
Terms

 

Total TDRs
Performing to
Modified
Terms

 

Commercial:

 

 

 

 

 

 

 

 

 

Multiple modifications

 

$

 

$

 

$

 

$

46

 

Construction:

 

 

 

 

 

 

 

 

 

Extended maturity

 

 

 

 

98

 

Multiple modifications

 

 

 

 

2,504

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only payments

 

 

 

 

171

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Extended maturity

 

 

 

 

3,148

 

Multiple modifications

 

 

169

 

169

 

815

 

Residential:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

 

 

 

318

 

Extended maturity

 

 

64

 

64

 

1,949

 

Multiple modifications

 

28

 

 

28

 

978

 

Home equity

 

 

 

 

 

 

 

 

 

Multiple modifications

 

 

 

 

629

 

Total

 

$

28

 

$

233

 

$

261

 

$

10,656

 

 

30



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

December 31, 2014:

 

 

 

TDRs Greater than
30 Days Past Due
and
Still Accruing

 

TDRs on
Nonaccrual

 

Total TDRs
Not
Performing
to
Modified
Terms

 

Total TDRs
Performing
to Modified
Terms

 

 

 

(In thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

Extended maturity

 

$

 

$

3,558

 

$

3,558

 

$

344

 

Multiple modifications

 

 

 

 

18

 

Construction: Interest rate reduction

 

 

 

 

1,386

 

Extended maturity

 

 

 

 

115

 

Interest only payments

 

 

556

 

556

 

 

Multiple modifications

 

 

 

 

2,559

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only

 

 

 

 

180

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Extended maturity

 

 

 

 

551

 

Multiple modifications

 

 

 

 

348

 

Residential:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

583

 

 

583

 

324

 

Extended maturity

 

 

 

 

477

 

Multiple modifications

 

220

 

 

220

 

30

 

Home equity

 

 

 

 

 

 

 

 

 

Multiple modifications

 

 

 

 

648

 

Total

 

$

803

 

$

4,114

 

$

4,917

 

$

6,980

 

 

There were no trouble debt restructurings that defaulted within 12 months of modifications during the three and nine months ended September 30, 2015 and September 30, 2014.

 

During the quarter and nine months ended September 30, 2015, the terms of certain loans were modified as troubled debt restructurings.  The modification of the terms of such loans included one or a combination of the following:  a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or adjustment of scheduled loan payments from principal and interest to interest only.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

 

31



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended September 30, 2015 and 2014 and their performance, by modification type (in thousands):

 

 

 

Number
of Loans

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

TDRs
Performing
to Modified
Terms

 

TDRs Not
Performing to
Modified
Terms

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Multiple modifications

 

1

 

18

 

18

 

18

 

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

 

 

Multiple modifications

 

1

 

169

 

169

 

 

169

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens Multiple modifications

 

2

 

257

 

257

 

257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens Multiple modifications

 

1

 

31

 

31

 

31

 

 

 

32



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2015 and 2014 and their performance, by modification type (in thousands):

 

 

 

Number
of Loans

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

TDRs
Performing
to Modified
Terms

 

TDRs Not
Performing to
Modified
Terms

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Multiple modifications

 

1

 

$

18

 

$

18

 

$

18

 

$

 

Construction:

 

 

 

 

 

 

 

 

 

 

 

Extended maturity

 

4

 

2,866

 

2,866

 

2,971

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

 

 

Extended maturity

 

1

 

175

 

175

 

180

 

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

 

 

Extended maturity

 

3

 

2,840

 

2,840

 

2,731

 

 

Multiple modifications

 

1

 

169

 

169

 

 

169

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

 

 

Extended maturity

 

2

 

1,529

 

1,529

 

1,543

 

 

Multiple modifications

 

3

 

872

 

872

 

868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

1

 

$

556

 

$

556

 

$

556

 

$

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

2

 

888

 

888

 

856

 

 

Multiple modifications

 

1

 

31

 

31

 

30

 

 

 

33



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  On a monthly basis, the Company reviews its loans that are risk rated Watch, Special Mention, Substandard, or Doubtful to determine they are properly classified.  In addition, the Company reviews loans rated as a “pass” that have exhibited signs that may require a classification change, such as past due greater than 30 days and other relevant information including:  loan officer recommendations, knowledge of specific borrower circumstances, and receipt of borrower financial statements.  The Company uses the following definitions for risk ratings:

 

The Company uses the following definitions for its criticized loan risk ratings:

 

Watch.  Loans classified as watch are not considered “rated” or “classified” for regulatory purposes, but are considered criticized assets which exhibit modest deterioration in financial performance or external threats.

 

Special Mention.  Loans classified as special mention exhibit potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, or in the Company’s credit position at some future date.  Economic or market conditions exist which may affect the borrower more severely than other companies in its industry.

 

The Company uses the following definitions for its classified loan risk ratings:

 

Substandard.  Loans classified as substandard are characterized by having well defined financial weakness.  Substandard loans are usually evidenced by chronic or emerging past due performance and serious deficiencies in the primary source of repayment.

 

Doubtful.  Loans classified as doubtful have a well-defined and documented financial weaknesses.  They have all the weaknesses of a substandard loan with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Generally, loans classified as doubtful are on non-accrual.

 

34



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.   Loans (Continued)

 

Loans not meeting the criteria above that are listed as pass are included in groups of homogeneous loans.  The risk category of loans by class of loans based on the most recent analysis performed as of September 30, 2015 and December 31, 2014 is as follows:

 

September 30, 2015:

 

 

 

Criticized

 

Classified

 

Pass

 

Total

 

 

 

(In thousands)

 

Commercial

 

$

7,925

 

$

211

 

$

162,509

 

$

170,645

 

Construction

 

3,036

 

5,093

 

72,742

 

80,871

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/residential

 

6,140

 

3,378

 

144,223

 

153,741

 

Other nonfarm/residential

 

10,033

 

15,340

 

164,911

 

190,284

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

19,764

 

7,663

 

273,681

 

301,108

 

Home equity

 

544

 

2,104

 

72,521

 

75,169

 

Consumer

 

34

 

45

 

20,725

 

20,804

 

Total

 

$

47,476

 

$

33,834

 

$

911,312

 

$

992,622

 

 

 

 

 

 

 

 

 

 

 

Loans included in totals above acquired First Financial Service Corporation

 

$

7,043

 

$

25,792

 

$

287,772

 

$

320,607

 

Loans excluded from totals above classified as Loans Held For Sale

 

$

1,675

 

$

18,826

 

$

395

 

$

20,896

 

 

December 31, 2014:

 

 

 

Criticized

 

Classified

 

Pass

 

Total

 

 

 

(In thousands)

 

Commercial

 

$

6,394

 

$

3,930

 

$

113,403

 

$

123,727

 

Construction

 

3,476

 

6,105

 

33,267

 

42,848

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/residential

 

7,144

 

742

 

104,519

 

112,405

 

Other nonfarm/residential

 

9,583

 

551

 

90,498

 

100,632

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

16,590

 

3,502

 

163,745

 

183,837

 

Home equity

 

647

 

802

 

33,401

 

34,850

 

Consumer

 

2

 

107

 

5,167

 

5,276

 

Total

 

$

43,836

 

$

15,739

 

$

544,000

 

$

603,575

 

 

35



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.   Foreclosed and Repossessed Assets

 

The following table presents the major categories of foreclosed and repossessed assets Foreclosed and repossessed asset activity was as follows:

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands)

 

Construction

 

$

1,945

 

$

1,407

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/residential

 

911

 

2,036

 

Other nonfarm/residential

 

4,451

 

588

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

1,656

 

400

 

Consumer

 

65

 

 

 

 

$

9,028

 

$

4,431

 

 

Foreclosed and repossessed asset activity was as follows for the three and nine months ended September 30, 2015 and 2014:

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Balance as of January 1

 

$

8,354

 

$

6,029

 

$

4,431

 

$

5,988

 

Loans transferred to foreclosed and repossessed assets

 

2,345

 

228

 

12,542

 

1,468

 

Foreclosed and repossessed assets acquired from First Financial Service Corporation

 

 

 

3,228

 

 

Direct write-downs

 

 

(251

)

(75

)

(251

)

Other adjustments

 

(5

)

37

 

(5

)

37

 

Sales

 

(1,666

)

(1,366

)

(11,093

)

(2,565

)

Balance as of September 30

 

$

9,028

 

$

4,677

 

$

9,028

 

$

4,677

 

 

Expenses for the three and nine months ended September 30, 2015 and 2014 related to foreclosed and repossessed assets include:

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Net (gain)/loss on sales

 

$

(30

)

$

(533

)

$

(40

)

$

(586

)

Direct write-downs

 

 

251

 

75

 

251

 

Operating expenses, net of rental income

 

149

 

134

 

333

 

378

 

 

 

$

119

 

$

(148

)

$

368

 

$

43

 

 

The Company was in process of foreclosure of residential real estate loans with outstanding balances of $1.4 million and $805,000 as September 30, 2015 and December 31, 2014, respectively.

 

36



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.   Deposits

 

Deposits at September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

Demand (NOW)

 

$

291,940

 

$

124,625

 

Money market accounts

 

217,904

 

145,731

 

Savings

 

131,839

 

49,088

 

Time deposits $250,000 and over

 

49,842

 

26,018

 

Time deposits less than $250,000

 

277,095

 

105,340

 

Total interest bearing deposits

 

968,620

 

450,802

 

Total non-interest bearing deposits

 

275,350

 

200,142

 

Total deposits

 

$

1,243,970

 

$

650,944

 

 

7.   Earnings Per Common Share

 

Earnings per common share were computed as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands, except for share and per share amounts)

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,917

 

$

2,316

 

$

6,546

 

$

6,576

 

Preferred stock dividend

 

(110

)

(110

)

(329

)

(329

)

Net income available to common shareholders

 

$

3,807

 

$

2,206

 

$

6,217

 

$

6,247

 

Average shares outstanding

 

5,405,691

 

3,443,787

 

5,388,245

 

3,434,660

 

Net income per common share, basic

 

$

0.70

 

$

0.64

 

$

1.15

 

$

1.82

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

3,807

 

$

2,206

 

$

6,217

 

$

6,247

 

Average shares:

 

 

 

 

 

 

 

 

 

Common shares outstanding for basic

 

5,405,691

 

3,443,787

 

5,388,245

 

3,434,660

 

Add: Dilutive effects of outstanding stock options

 

17,674

 

21,221

 

18,492

 

29,661

 

Add: Dilutive effects of outstanding stock awards

 

47,192

 

15,808

 

50,468

 

8,471

 

Average dilutive potential common shares

 

5,470,557

 

3,480,816

 

5,457,205

 

3,472,792

 

Net income per common share, diluted

 

$

0.70

 

$

0.63

 

$

1.14

 

$

1.80

 

 

No stock options were excluded from the calculation of diluted net income per common share for the three months ended September 30, 2015 and 2014.  Stock options for 0 and 10,000 shares of common stock were excluded from the calculation of diluted net income per common share for the nine months ended September 30, 2015 and 2014, respectively, because their effect was antidilutive.

 

37



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

No restricted share awards were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2015 and 2014.

 

8.   Stock-Based Compensation Plans

 

Our stock award plan provides for the granting of both incentive and nonqualified stock options at exercise prices not less than the fair market value of the common stock on the date of grant and expiration dates of up to ten years.  Terms of the options are determined by our Board of Directors at the date of grant and generally vest over periods of three to four years.  Payment of the option price may be in cash or shares of common stock at fair market value on the exercise date at the election of the employee.  Non-employee directors are eligible to receive only nonqualified stock options.  We may grant stock options under the current plan for an additional 430,000 shares of common stock. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2015 and December 31, 2014 was $525,000 and $518,000, respectively. There was no remaining compensation cost related to unvested options as of September 30, 2015 and December 31, 2014.  The Company did not recognize expense for stock options for the three and nine months ended September 30, 2015 and 2014, respectively.  The Company has options vested and expected to vest of 76,500 with aggregate intrinsic value of $525,000 and a weighted average remaining contractual term of 1.25 years as of September 30, 2015.   As of December 31, 2014, the Company had options vested and expected to vest of 123,500 which had an aggregate intrinsic value of $518,000 and a weighted average remaining contractual term of 1.4 years.  During the nine months ended September 30, 2015, no options were granted, 500 options were forfeited, 7,700 options expired, and 38,800 stock options were exercised.  The Company received proceeds of $591,000 for the exercise of 23,300 stock options while the remainder were exercised using the cashless option, with the Company issuing net shares to the option holders.

 

For the three and nine months ended September 30, 2015, we recognized $643,000 and $1.1 million in expense for restricted stock units, respectively.  During the three months ended September 30, 2015, we granted 5,000 restricted stock units and no units were forfeited.  During the nine months ended September 30, 2015, 71,800 restricted stock units were granted while 300 units were forfeited.  The restricted stock units granted during the three months and nine months ended September 30, 2015 had an aggregate fair value of $139,000 and $2.0 million, respectively.  Of the total awards granted during the nine months ended September 30, 2015, 20,050 of awards vest in 2015, 17,900 vest in 2016, 15,050 vest in 2017, and 18,800 vest in 2018. The fair value of the restricted stock awards was calculated based on the Company’s stock price at the date of issuance.  At September 30, 2015, there were 147,375 outstanding and unvested restricted stock units.  For the three and nine months ended September 30, 2014, we recognized $102,000 and $303,000 in expense for restricted stock awards, respectively.

 

38



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair value:

 

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 

Level 3:  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate fair value.

 

Securities:  The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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 2 inputs). In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. These valuation methods are classified as Level 2 in the fair value hierarchy.

 

Impaired Loans:  Impaired loans are evaluated at the time the loan is identified as impaired and are recorded at the lower of the carrying amount of the loan or the fair value of the underlying collateral.  For collateral dependent loans, the fair value of real estate is primarily determined based on appraisals by qualified licensed appraisers.  These appraisals may use a single valuation approach or a combination depending on the type of collateral including the comparable sales or income capitalization approach.  The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances and condition of the collateral including the market for the particular collateral and management’s experience with similar types of collateral.  Impaired loans are evaluated quarterly for additional impairment.  Fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

 

Foreclosed and Repossessed Assets:  Foreclosed and repossessed assets are initially recorded at fair value less estimated costs to sell when acquired.  The fair value of foreclosed and repossessed assets is primarily determined based on appraisals by qualified appraisers whose qualifications have been reviewed by the Company.  The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances of the collateral and reduced by management’s estimate of costs to dispose of the asset.  Also, management reviews the assumptions included the appraisals and makes adjustments where circumstances warrant such as recent experience with similar assets.  Fair value of foreclosed and repossessed assets is classified as Level 3 in the fair value hierarchy.

 

39



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

Loans Held For Sale:  Loans held for sale are carried at the lower of cost or fair value, which is evaluated on an individual loan basis.  The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Assets at Fair
Value

 

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

 

 

(in thousands)

 

Assets (September 30, 2015):

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

122,728

 

$

 

122,728

 

$

 

U.S. Government sponsored entities and agencies

 

32,848

 

 

32,848

 

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

244,336

 

 

244,336

 

 

Corporate

 

3,325

 

 

3,325

 

 

Mutual Funds

 

249

 

 

249

 

 

Total available for sale securities

 

$

403,486

 

$

 

$

403,486

 

$

 

 

 

 

 

 

 

 

 

 

 

Assets (December 31, 2014):

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

85,451

 

$

 

$

85,451

 

$

 

U.S. Government sponsored entities and agencies

 

9,161

 

 

9,161

 

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

107,317

 

 

107,317

 

 

Mutual Funds

 

248

 

 

248

 

 

Total available for sale securities

 

$

202,177

 

$

 

$

202,177

 

$

 

 

There were no transfers between Level 1 and Level 2 during 2015 or 2014.

 

40



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

Assets measured at fair value on a nonrecurring basis are summarized below.

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Assets at
Fair Value

 

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(in thousands)

 

Assets (September 30, 2015):

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Construction

 

$

1,075

 

$

 

$

 

$

1,075

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,604

 

 

 

1,604

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

20,896

 

 

20,896

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Other nonfarm/nonresidential

 

204

 

 

 

204

 

 

 

 

 

 

 

 

 

 

 

Assets (December 31, 2014):

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

47

 

$

 

$

 

$

47

 

Construction

 

1,426

 

 

 

1,426

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner Occupied nonfarm/nonresidential

 

108

 

 

 

108

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,338

 

 

 

1,338

 

Home equity

 

84

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

1,407

 

 

 

1,407

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

2,036

 

 

 

2,036

 

Other nonfarm/nonresidential

 

588

 

 

 

588

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

400

 

 

 

400

 

 

41



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

The Company measures for impairment using the fair value of the collateral less costs to sell for collateral-dependent loans.  The Company’s collateral dependent impaired loans had a carrying value of $3.6 million as of September 30, 2015 with a valuation allowance of $934,000, resulting in provision for loan losses of $597,000 and $2.8 million for the three and nine months ended September 30, 2015, respectively.  The Company recorded $264,000 and $716,000 in provision for loan losses for collateral-dependent impaired loans for the three and nine months ended September 30, 2014.  Impaired loans totaled $15.0 million as of December 31, 2014, which included collateral dependent loans with a carrying value of $4.1 million and a valuation allowance of $1.1 million.

 

The Company evaluates the fair value of foreclosed and repossessed assets at the time they are transferred from loans and on a quarterly basis thereafter.  During the three and nine months ended September 30, 2015 the Company recognized charges to write down foreclosed and repossessed assets to their fair value of $0 and $75,000, respectively, compared to $251,000 for the three and nine months ended September 30, 2014.

 

42



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2015:

 

September 30, 2015:

 

 

 

Fair Value

 

Valuation
Technique(s)

 

Unobservable
Input(s)

 

Range(Weighted
Average)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

 

 

 

 

Construction

 

$

1,075

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

28%

 

Residential real estate

 

1,604

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

23%-37% (30%)

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

204

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

30%-33% (33%)

 

 

43



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

December 31, 2014:

 

 

 

Fair Value

 

Valuation
Technique(s)

 

Unobservable
Input(s)

 

Range -
(Weighted
Average)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

47

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

24%-28% (24%)

 

Construction

 

1,426

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

23%-55% (48%)

 

Commercial real estate

 

108

 

Income capitalization approach

 

Capitalization rate

 

22%

 

Residential real estate

 

1,422

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

14%-84% (24%)

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

$

1,407

 

Income capitalization approach

 

Capitalization rate

 

9%

 

 

 

 

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

15%-23% (22%)

 

Commercial real estate

 

2,624

 

Income capitalization approach

 

Capitalization rate

 

4%

 

 

 

 

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

10%-52% (31%)

 

Residential real estate

 

400

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

14%-60% (25%)

 

 

44



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

Fair value of Financial Instruments

 

Carrying amount and estimated fair values of financial instruments, not previously presented, at September 30, 2015 and December 31, 2014 were as follows:

 

September 30, 2015:

 

 

 

Carrying

 

Fair Value Measurements Using

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

29,618

 

$

29,618

 

$

 

$

 

$

29,618

 

Interest-bearing deposits in other financial institutions

 

10,814

 

10,814

 

 

 

10,814

 

Loans held for sale

 

20,896

 

 

20,903

 

 

20,903

 

Loans, net

 

986,206

 

 

 

999,031

 

999,031

 

Accrued interest receivable

 

5,151

 

19

 

1,962

 

3,170

 

5,151

 

Federal Home Loan Bank Stock

 

3,891

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,243,970

 

 

1,220,938

 

 

1,220,938

 

Short-term borrowings

 

74,034

 

 

74,028

 

 

74,028

 

Other borrowings

 

93,974

 

 

61,684

 

25,744

 

87,428

 

Accrued interest payable

 

375

 

 

300

 

75

 

375

 

 

45



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

December 31, 2014:

 

 

 

Carrying

 

Fair Value Measurements Using

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

12,872

 

$

12,872

 

$

 

$

 

$

12,872

 

Interest-bearing deposits in other financial institutions

 

6,808

 

6,808

 

 

 

6,808

 

Deposit for partial redemption of acquiree’s preferred stock and unpaid dividends

 

11,341

 

11,341

 

 

 

11,341

 

Loans, net

 

597,110

 

 

 

606,554

 

606,554

 

Accrued interest receivable

 

3,152

 

 

1,016

 

2,136

 

3,152

 

Federal Home Loan Bank and Federal Reserve Stock

 

4,964

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

650,944

 

 

654,986

 

 

654,986

 

Short-term borrowings

 

45,850

 

 

45,744

 

 

45,744

 

Other borrowings

 

67,000

 

 

50,061

 

9,836

 

59,897

 

Accrued interest payable

 

158

 

 

 

140

 

18

 

158

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a) Cash and Cash Equivalents

 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

(b) FHLB and FRB Stock

 

It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on transferability.

 

(c) Loans

 

Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

46



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.  Fair Value (Continued)

 

(d) Deposits

 

The fair value disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(e) Other Borrowings

 

The fair values of the Company’s other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(f) Short-Term Borrowings

 

The fair values of the Company’s short-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

(g) Accrued Interest Receivable/Payable

 

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the classification of the associated asset or liability.

 

(h) Off-balance Sheet Instruments

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

47



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Accumulated other comprehensive income (loss)

 

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the three month periods ended September, 2015 and 2014 (in thousands):

 

 

 

Unrealized Gains and
Losses on Available-
for-Sale Securities

 

Defined Benefit
Pension Items

 

Total

 

September 30, 2015:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

623

 

$

(473

)

$

150

 

Other comprehensive loss before reclassifications

 

2,397

 

(67

)

2,330

 

Amounts reclassified from accumulated other comprehensive income

 

1

 

8

 

9

 

Balance, end of period

 

$

3,021

 

$

(532

)

$

2,489

 

 

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,119

 

$

(365

)

$

754

 

Other comprehensive income (loss) before reclassifications

 

413

 

(16

)

397

 

Amounts reclassified from accumulated other comprehensive income

 

(114

)

(2

)

(116

)

Balance, end of period

 

$

1,418

 

$

(383

)

$

1,035

 

 

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the nine month periods ended September 30, 2015 and 2014 (in thousands):

 

 

 

Unrealized Gains and
Losses on Available-
for-Sale Securities

 

Defined Benefit
 Pension Items

 

Total

 

September 30, 2015:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,280

 

$

(471

)

$

1,809

 

Other comprehensive income (loss) before reclassifications

 

774

 

(64

)

710

 

Amounts reclassified from accumulated other comprehensive income

 

(33

)

3

 

(30

)

Balance, end of period

 

$

3,021

 

$

(532

)

$

2,489

 

 

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,364

)

$

(369

)

$

(1,733

)

Other comprehensive income before reclassifications

 

3,091

 

(5

)

3,086

 

Amounts reclassified from accumulated other comprehensive income

 

(309

)

(9

)

(318

)

Balance, end of period

 

$

1,418

 

$

(383

)

$

1,035

 

 

48



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Accumulated other comprehensive income (loss)

 

The following is a detail of amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ending September 30, 2015 and 2014:

 

September 30, 2015:

 

Details about Accumulated Other
Comprehensive Income (Loss)
Components

 

Amount Reclassified From
Accumulated Other
Comprehensive Income

 

Affected Line Item in the
Statement Where Net Income
Is Presented

 

 

 

(In Thousands)

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

1

 

Net gain on sales of available-for-sale securities

 

 

 

 

Income tax expense

 

 

 

$

1

 

Net of tax

 

 

 

 

 

 

 

Amortization of defined benefit pension plan unrecognized loss

 

$

12

 

Salaries and employee benefits

 

 

 

(4

)

Income tax expense

 

 

 

$

8

 

Net of tax

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

9

 

Net of tax

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(172

)

Net gain on sales of available-for-sale securities

 

 

 

58

 

Income tax expense

 

 

 

$

(114

)

Net of tax

 

 

 

 

 

 

 

Amortization of defined benefit pension plan unrecognized loss

 

$

(4

)

Salaries and employee benefits

 

 

 

2

 

Income tax expense

 

 

 

$

(2

)

Net of tax

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

(116

)

Net of tax

 

 

The following is a detail of amounts reclassified out of each component of accumulated other comprehensive income (loss) for the nine months ending September 30, 2015 and 2014:

 

September 30, 2015:

 

Details about Accumulated Other
Comprehensive Income (Loss)
Components

 

Amount Reclassified From
Accumulated Other
Comprehensive Income

 

Affected Line Item in the
Statement Where Net Income
Is Presented

 

 

 

(In Thousands)

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(50

)

Net gain on sales of available-for-sale securities

 

 

 

17

 

Income tax expense

 

 

 

$

(33

)

Net of tax

 

 

 

 

 

 

 

Amortization of defined benefit pension plan unrecognized loss

 

$

4

 

Salaries and employee benefits

 

 

 

(1

)

Income tax expense

 

 

 

$

3

 

Net of tax

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

(30

)

Net of tax

 

 

49



Table of Contents

 

YOUR COMMUNITY BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.  Accumulated other comprehensive income (loss)

 

September 30, 2014:

 

Details about Accumulated Other
Comprehensive Income (Loss)
Components

 

Amount Reclassified From
Accumulated Other
Comprehensive Income

 

Affected Line Item in the
Statement Where Net Income
Is Presented

 

 

 

(In Thousands)

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(468

)

Net gain on sales of available-for-sale securities

 

 

 

159

 

Income tax expense

 

 

 

$

(309

)

Net of tax

 

 

 

 

 

 

 

Amortization of defined benefit pension plan unrecognized loss

 

$

(14

)

Salaries and employee benefits

 

 

 

5

 

Income tax expense

 

 

 

$

(9

)

Net of tax

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

(318

)

Net of tax

 

 

11.  Repurchase agreements

 

Repurchase agreements totaled $43.5 million as of September 30, 2015 and consisted entirely of overnight obligations.  The Company pledged residential mortgage-backed agencies issued by U.S. Government sponsored entities with a carrying amount of $55.9 million to secure repurchase agreements as of September 30, 2015.

 

50



Table of Contents

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOUR COMMUNITY BANKSHARES, INC.

 

Safe Harbor Statement for Forward-Looking Statements

 

This report may contain forward-looking statements within the meaning of the federal securities laws.  These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

 

Forward-looking statements are not guarantees of future performance.  Numerous risks and uncertainties could cause or contribute to our actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.  Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our filings with the Securities and Exchange Commission.

 

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by us or on our behalf.  We assume no obligation to update any forward-looking statements.

 

Financial Condition

 

Total assets of the Company increased to $1.573 billion as of September 30, 2015 from $888.7 million as of December 31, 2014 due to the acquisition of First Financial Service Corporation (“First Financial”) on January 1, 2015.  Most categories of assets were impacted by the acquisition, primarily net loans which increased to $987.3 million at September 30, 2015 from $597.1 million as of December 31, 2014 and securities available for sale which increased $403.5 million from $202.2 million over the same periods.  In connection with the acquisition, the Company recorded goodwill of $4.1 million after determining the fair value of assets acquired and liabilities assumed.  The Company is still in the process of gathering information about the day one fair values of assets acquired and liabilities assumed which are subject to change during the measurement period.  See footnote 2 to the Company’s consolidated financial statements for further information on the acquisition of First Financial.

 

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Net loans increased $390.2 million to $987.3 million as of September 30, 2015 from $597.1 million as of December 31, 2014.  As previously discussed, the biggest driver of the increase was the acquisition of First Financial.  The Company determined the fair value of loans acquired in the transaction was $409.0 million which included a non-accretable yield adjustment of $13.0 million on purchased credit impaired loans and an accretable yield adjustment of $6.1 million (see footnote 4 to the consolidated financial statements for more information on acquired loans).  Also impacting net loans, was the reclassification of $20.8 million of loans to loans held for sale as of September 30, 2015.  The Company has executed a contract with third-party investors to sell the portfolio with an anticipated closing in the fourth quarter of 2015.  Management elected to sell the loans to reduce the level of non-performing, criticized, and classified loans in the Company’s portfolio.  As a result of the reclassification, the Company’s non-performing assets, criticized and classified loans, and other credit quality metrics improved substantially from June 30, 2015.  Further information about the loans reclassified to loans held for sale is included in footnote 4 to the consolidated financial statements.

 

Securities available for sale increased to $403.5 million at September 30, 2015 from $202.2 million as of December 31, 2014 due to the acquisition of investments with a fair value of $223.6 million and purchases of $58.9 million during 2015.  During the nine months ended September 30, 2015, the Company sold $38.9 million of securities primarily to conform the acquired portfolio to the Company’s investment policy and overall strategic plan.  The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk.  The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates.

 

Total deposits increased to $1.244 billion at September 30, 2015 from $650.9 million at December 31, 2014 as deposits with a fair value of $704.8 million were assumed in the First Financial transaction.  Excluding the assumption of First Financial’s deposits, total deposits decreased by $111.8 million as the Company repriced the higher costing deposits assumed from First Financial resulting in deposit run-off.

 

Net Income Available to Common Shareholders.  Net income available to common shareholders increased to $3.8 million for the three months ended September 30, 2015 from $2.2 million for the same period in 2014.  Basic and diluted earnings per common share increased to $0.70 per share for the third quarter of 2015 as compared to $0.64 and $0.63 per common share, respectively, for the third quarter of 2014.  The increase in net income available to common shareholders was mostly attributable to the acquisition of First Financial in the first quarter which led to increases in net interest income of $5.2 million and non-interest income of $1.8 million, offset by increases in non-interest expense of $5.8 million.  The annualized return on average assets and average shareholders’ equity were 0.99% and 10.44% for the three months ended September 30, 2015, respectively, compared to 1.06% and 9.59% for the equivalent period in 2014.

 

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Net income available to common shareholders for the nine month periods ended September 30, 2015 and 2014 was $6.2 million while basic and diluted earnings per common share were $1.15 and $1.14 for 2015 compared to $1.82 and $1.80 in 2014.  The decrease in basic and diluted earnings per common share was attributable to merger and integration charges of $5.3 million recognized in non-interest expense in the 2015 associated primarily with the First Financial transaction as well as the merger of the Company’s two subsidiary banks during the third quarter.  In addition to the increase in non-interest expense to $41.1 million in 2015 from $19.9 million in 2014, basic and diluted earnings per common share declined due to an increase in provision for loan losses of $1.6 million to $2.3 million, offset by increases in net interest income of $17.2 million and non-interest income of $3.7 million.  The annualized return on average assets and shareholders’ equity were 0.55% and 5.93% for the nine months ended September 30, 2015, respectively, compared to 1.02% and 9.44% for the equivalent period in 2014.

 

Net interest income.  Net interest income increased by $5.2 million to $13.4 million for the third quarter of 2015 compared to 2014, while the Company’s net interest margin on a fully taxable equivalent basis decreased from 4.28% in 2014 to 3.94% in 2015.  The growth in net interest income was due to average earning assets increasing to $1.419 billion in 2015 from $802.6 million as a result of the First Financial acquisition.  The average balances for most earning assets and interest-bearing liabilities increased from the same period in 2014.  The yield on earning assets on a fully taxable equivalent basis declined to 4.30% in 2015 from 4.50% in 2014 due to lower yields on tax-exempt securities and loans which were 5.35% and 4.96%, respectively, for 2015 compared to 5.50% and 4.97% in 2014.  The yield on tax-exempt securities continues to be impacted by the current interest rate environment as maturities and repayments are replaced with lower yielding investments.  The Company’s loan yield faces the same interest rate pressure, but was buffeted by accretion of $648,000 on acquired loans in 2015 compared to $126,000 in 2014.  The average balance of interest-bearing liabilities increased to $1.129 billion with an average cost of 0.46% in 2015 compared to $570.3 million and 0.32% in 2014.  The increase in the average balance and cost between the periods was the assumption of First Financial’s liabilities which generally were higher costing compared to the legacy deposits of the Company.  Offsetting the higher contractual rates of liabilities assumed was accretion of $535,000 recognized for time deposits and other borrowings.

 

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Net interest income for the nine months ended September 30, 2015 increased to $40.8 million from $23.6 million while the net interest margin on a fully taxable equivalent basis declined to 3.95% in 2015 from 4.17% in 2014.  The increase in net interest income was due to the increase in average interest earning assets over the period as a result of the aforementioned First Financial acquisition.  Average earning assets increased to $1.441 billion for the period ending September 30, 2015 with the majority of the increase in net loans to $998.5 million and taxable securities available for sale to $296.9 million.  The Company’s yield on earning assets was lower period to period due to the increase in interest-bearing deposits in other financial institutions and taxable securities as a percentage of total interest earning assets.  For 2015, taxable securities and interest-bearing deposits in other financial institutions represented 23.6% of interest earning assets at respective yields of 1.77% and 0.43% as compared to 16.1% of interest earning assets in 2014.  The yield on loans increased from 4.85% in 2014 to 5.09% in 2015, which partially offset the decrease in total yield from the change in the interest earning assets mix.  The increase in loan yields was primarily due to accretion income recognized from acquired loans of $2.3 million in 2015 compared to $232,000 in 2014.  Average interest-bearing liabilities increased to $1.165 billion for the nine months ended September 30, 2015 compared to $570.6 million in 2014 while the average cost increased to 0.43% from 0.33% over the respective periods.  The increase in average balance and cost was the assumption of deposits from First Financial which had higher costs than the Company’s legacy funding.  The Company’s cost of funds for 2015 was reduced due to accretion recognized during 2015 of $1.7 million, primarily on time deposits.

 

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Average Balance Sheets.  The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.  Average balances are computed on daily average balances.  For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities.  A tax rate of 35% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent (“FTE”) basis.  Loans held for sale and loans no longer accruing interest are included in total loans.

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

 

 

(In thousands)

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with banks

 

$

17,489

 

$

32

 

0.73

%

$

14,224

 

$

18

 

0.51

%

Taxable securities

 

283,885

 

1,272

 

1.78

 

109,297

 

484

 

1.76

 

Tax-exempt securities

 

112,408

 

1,515

 

5.35

 

80,809

 

1,120

 

5.50

 

Total loans and fees (1) (2)

 

1,001,041

 

12,515

 

4.96

 

592,327

 

7,417

 

4.97

 

FHLB and Federal Reserve stock

 

3,837

 

45

 

4.65

 

5,964

 

72

 

4.78

 

Total earning assets

 

1,418,660

 

15,379

 

4.30

 

802,621

 

9,111

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(7,757

)

 

 

 

 

(8,505

)

 

 

 

 

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

32,263

 

 

 

 

 

16,032

 

 

 

 

 

Bank premises and equipment, net

 

36,869

 

 

 

 

 

18,143

 

 

 

 

 

Other assets

 

92,150

 

 

 

 

 

38,889

 

 

 

 

 

Total assets

 

$

1,572,185

 

 

 

 

 

$

867,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

$

652,860

 

$

253

 

0.15

%

$

338,092

 

$

155

 

0.18

%

Time deposits

 

339,480

 

317

 

0.37

 

138,573

 

100

 

0.28

 

Short-term borrowings

 

50,067

 

40

 

0.32

 

35,879

 

19

 

0.21

 

Other borrowings

 

86,752

 

691

 

3.16

 

57,707

 

182

 

1.25

 

Total interest-bearing liabilities

 

1,129,159

 

1,301

 

0.46

 

570,251

 

456

 

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest demand deposits

 

285,743

 

 

 

 

 

195,011

 

 

 

 

 

Accrued interest payable and other liabilities

 

8,478

 

 

 

 

 

6,127

 

 

 

 

 

Stockholders’ equity

 

148,805

 

 

 

 

 

95,791

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,572,185

 

 

 

 

 

$

867,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (taxable equivalent basis)

 

 

 

$

14,078

 

 

 

 

 

$

8,655

 

 

 

Less: taxable equivalent adjustment

 

 

 

(684

)

 

 

 

 

(481

)

 

 

Net interest income

 

 

 

$

13,394

 

 

 

 

 

$

8,174

 

 

 

Net interest spread

 

 

 

 

 

3.84

%

 

 

 

 

4.18

%

Net interest margin

 

 

 

 

 

3.94

 

 

 

 

 

4.28

 

 


(1)                The amount of direct loan origination cost included in interest on loans was $103 and $64 for the three months ended September 30, 2015 and 2014.

 

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(2)                Calculations include non-accruing loans in the average loan amounts outstanding.

(3)                The amount of accretion recorded for acquired loans included in interest income was $648 and $126 for the three months ended September 30, 2015 and 2014.

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

 

 

(In thousands)

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

$

42,696

 

$

136

 

0.43

%

$

13,614

 

$

53

 

0.52

%

Taxable securities

 

296,872

 

3,932

 

1.77

 

114,196

 

1,534

 

1.80

 

Tax-exempt securities

 

98,123

 

4,014

 

5.47

 

80,472

 

3,374

 

5.61

 

Total loans and fees (1) (2)

 

998,508

 

38,042

 

5.09

 

580,204

 

21,039

 

4.85

 

FHLB and Federal Reserve stock

 

5,051

 

209

 

5.53

 

5,960

 

188

 

4.21

 

Total earning assets

 

1,441,250

 

46,333

 

4.30

 

794,446

 

26,188

 

4.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(7,379

)

 

 

 

 

(8,495

)

 

 

 

 

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

35,693

 

 

 

 

 

14,318

 

 

 

 

 

Bank premises and equipment, net

 

37,589

 

 

 

 

 

18,330

 

 

 

 

 

Other assets

 

98,021

 

 

 

 

 

40,073

 

 

 

 

 

Total assets

 

$

1,605,174

 

 

 

 

 

$

858,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

$

679,433

 

$

784

 

0.15

%

$

325,757

 

$

460

 

0.19

%

Time deposits

 

356,230

 

940

 

0.35

 

143,751

 

315

 

0.29

 

Short-term borrowings

 

42,494

 

85

 

0.27

 

40,325

 

72

 

0.24

 

Other borrowings

 

87,121

 

1,956

 

3.00

 

60,718

 

558

 

1.23

 

Total interest-bearing liabilities

 

1,165,278

 

3,765

 

0.43

 

570,551

 

1,405

 

0.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest demand deposits

 

282,929

 

 

 

 

 

189,897

 

 

 

 

 

Accrued interest payable and other liabilities

 

9,305

 

 

 

 

 

5,094

 

 

 

 

 

Stockholders’ equity

 

147,662

 

 

 

 

 

93,130

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,605,174

 

 

 

 

 

$

858,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (taxable equivalent basis)

 

 

 

$

42,568

 

 

 

 

 

$

24,783

 

 

 

Less: taxable equivalent adjustment

 

 

 

(1,776

)

 

 

 

 

(1,147

)

 

 

Net interest income

 

 

 

$

40,792

 

 

 

 

 

$

23,636

 

 

 

Net interest spread

 

 

 

 

 

3.87

%

 

 

 

 

4.08

%

Net interest margin

 

 

 

 

 

3.95

 

 

 

 

 

4.17

 

 


(1)                The amount of direct loan origination cost included in interest on loans was $199 and $262 for the nine months ended September 30, 2015 and 2014.

(2)                Calculations include non-accruing loans in the average loan amounts outstanding.

(3)                The amount of accretion recorded for acquired loans included in interest income was $2,265 and $232 for the nine months ended September 30, 2015 and 2014.

 

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Rate/Volume Analysis.  The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense on a fully taxable equivalent basis during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

 

 

Three Months Ended September 30, 2015
compared to
Three Months Ended September 30, 2014
Increase/(Decrease) Due to

 

Nine Months Ended September 30, 2015
compared to
Nine Months Ended September 30, 2014
Increase/(Decrease) Due to

 

 

 

Total Net
Change

 

Volume

 

Rate

 

Total Net
Change

 

Volume

 

Rate

 

 

 

(In thousands)

 

(In thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

$

14

 

$

5

 

$

9

 

$

83

 

$

94

 

$

(11

)

Taxable securities

 

788

 

782

 

6

 

2,398

 

2,420

 

(22

)

Tax-exempt securities

 

395

 

427

 

(32

)

640

 

724

 

(84

)

Total loans and fees

 

5,098

 

5,109

 

(11

)

17,003

 

15,886

 

1,117

 

FHLB and Federal Reserve stock

 

(27

)

(25

)

(2

)

21

 

(32

)

53

 

Total increase in interest income

 

6,268

 

6,298

 

(30

)

20,145

 

19,092

 

1,053

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

98

 

125

 

(27

)

324

 

421

 

(97

)

Time Deposits

 

217

 

180

 

37

 

625

 

549

 

76

 

Short-term borrowings

 

21

 

9

 

12

 

13

 

4

 

9

 

Other borrowings

 

509

 

126

 

383

 

1,398

 

324

 

1,074

 

Total increase in interest expense

 

845

 

440

 

405

 

2,360

 

1,298

 

1,062

 

Increase in net interest income

 

$

5,423

 

$

5,858

 

$

(435

)

$

17,785

 

$

17,794

 

$

(9

)

 

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Allowance and Provision for Loan Losses.  Our financial performance depends on the quality of the loans we originate and management’s ability to assess the degree of risk in existing loans when it determines the allowance for loan losses.  An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses could have an adverse effect on net income.  The allowance is determined based on the application of loss estimates to graded loans by categories.

 

Summary of Loan Loss Experience:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Activity for the period ended:

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

8,045

 

$

8,481

 

$

6,465

 

$

8,009

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Residential real estate

 

(608

)

(200

)

(812

)

(343

)

Commercial real estate

 

(47

)

 

(48

)

(23

)

Construction

 

(560

)

(150

)

(592

)

(150

)

Commercial business

 

(501

)

(528

)

(2,411

)

(529

)

Home equity

 

(18

)

(60

)

(66

)

(103

)

Consumer

 

(141

)

(46

)

(292

)

(157

)

Total

 

(1,875

)

(984

)

(4,221

)

(1,305

)

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Residential real estate

 

66

 

3

 

114

 

10

 

Commercial real estate

 

45

 

11

 

894

 

106

 

Construction

 

 

 

521

 

67

 

Commercial business

 

53

 

85

 

94

 

175

 

Home equity

 

32

 

4

 

61

 

13

 

Consumer

 

50

 

18

 

227

 

71

 

Total

 

246

 

121

 

1,911

 

442

 

Net loan charge-offs

 

(1,629

)

(863

)

(2,310

)

(863

)

Provision for loan losses

 

 

166

 

2,261

 

638

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

6,416

 

$

7,784

 

$

6,416

 

$

7,784

 

 

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Provision for loan losses was $0 and $2.3 million for the three and nine months ended September 30, 2015 as compared to $166,000 and $638,000 for the equivalent periods in 2014.  Net charge-offs for the three and nine months ended September 30, 2015 were $1.6 million and $2.3 million compared to $863,000 in 2014.  Net charge-offs for nine months ended September 30, 2015 increased due to a $1.7 million charge-off for one credit relationship, or the full amount of allocated reserve during the second quarter of 2015 as well as charge-offs of $1.0 million for loans transferred to loans held for sale during the third quarter of 2015.  During the third quarter, the Company transferred loans with a net carrying amount of $20.7 million to held for sale in an effort to reduce the level of non-performing loans.  The Company’s non-performing loans decreased to $4.5 million as of September 30, 2015 which included $2.0 million of loans acquired from First Financial and excluded $5.0 million transferred to loans held for sale.  Additionally, the Company’s total past due loans decreased to $9.9 million as of September 30, 2015 after transferring loans with a carrying amount of $5.1 million to held for sale from $12.1 million as of December 31, 2014.  The decrease in the Company’s provision for loan losses for the third quarter was due to a decline in the Company’s average net charge-off history which is a significant component in the calculation of the allowance for loans collectively evaluated for impairment.  The Company utilizes a three year look back period for purposes of calculating its historical net charge-off rate which has declined as net charge-offs have declined over the previous three years.  The Company’s provision for the loans losses for the nine months ended September 30, 2015 was due primarily to the allocation and charge-off of $1.7 million for one credit in the second quarter of 2015.  The Company recognized the additional provision for the credit due to updated information obtained in the second quarter about the value of the collateral securing the loan and immediately charged-off the allocation as the loan is considered collateral dependent.  Subsequent to the charge-off, the loan had a remaining carrying of $890,000 and was transferred into loans held for sale in the third quarter.

 

The Company’s classified loans (substandard and doubtful) increased to $33.8 million as of September 30, 2015 from $15.7 million as of December 31, 2014 while criticized loans (watch and special mention) increased to $47.5 million from $43.8 million.  The increase in both was due to the acquisition of loans from First Financial which accounted for $25.8 million of the classified loans and $7.0 million of the criticized loans as of September 30, 2015.  Additionally, the Company transferred criticized loans with a carrying amount of $1.7 million and classified loans of $18.8 million to loans held for sale as of September 30, 2015 which were excluded from the aforementioned totals above.

 

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Asset Quality.  Loans, including impaired loans, are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the process of collection.  When these loans are placed on non-accrual status, all unpaid accrued interest is reversed and the loans remain on non-accrual status until the loan becomes current or the loan is deemed uncollectible and is charged off.  Impaired loans are those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement.  A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  TDR’s totaled $10.9 million at September 30, 2015 and $11.9 million December 31, 2014, while $233,000 and $4.1 million were included in the Company’s non-accrual loans as of the same dates, respectively.

 

The Company’s non-performing assets as of September 30, 2015 and December 31, 2014 were as follows:

 

 

 

September 30,
2015

 

December 31,
2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

Loans on non-accrual status

 

$

4,486

 

$

7,535

 

Loans past due over 90 days still on accrual

 

 

 

Total non-performing loans

 

4,486

 

7,535

 

Foreclosed and repossessed assets

 

9,028

 

4,431

 

Total non-performing assets

 

$

13,514

 

$

11,966

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.45

%

1.25

%

Non-performing assets to total loans

 

1.36

 

1.98

 

Allowance as a percent of non-performing loans

 

143.02

 

85.79

 

Allowance as a percent of total loans

 

0.65

 

1.07

 

 

Included in the totals above for September 30, 2015 were non-accrual loans with a carrying amount of $2.0 million and foreclosed and repossessed assets of $4.9 million that were acquired from First Financial Service Corporation.

 

Non-interest income.  Non-interest income increased to $3.5 million for the third quarter of 2015 from $1.7 million for the equivalent period in 2014.  The increase was driven primarily by service charges on deposit accounts, interchange income, earnings on company owned life insurance as well as gain on recognition of life insurance benefit.  Service charges on deposit accounts increased to $1.7 million in 2015 from $874,000 in 2014 while interchange income increased to $575,000 from $281,000 over the respective periods.  The increase in both categories was directly attributable to the assumed deposit accounts from First Financial and the corresponding interchange activity.  Earnings on bank owned life insurance increased to $226,000 in 2015 from $169,000 in 2014 as the Company acquired $10.8 million in bank owned life insurance in connection with the First Financial acquisition.  Non-interest income for the

 

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three months in 2015 was significantly impacted by a gain on recognition of life insurance benefit of $835,000 compared to $0 in 2014.  The life insurance benefit of $835,000 was not subject to income tax and was not expected to be repeated in 2015.

 

Non-interest income increased by $3.7 million to $8.6 million for the nine months ended September 30, 2015 from $4.9 million in 2014 due to increases in service charges on deposit accounts of $2.2 million, earnings on bank owned life insurance of $230,000, and interchange income of $614,000, and gain on recognition of life insurance benefit of $835,000, offset by a decrease in net gains on sales of available for sale securities of $418,000.  As previously discussed, the increase in service charges on deposit accounts and interchange income was driven by the assumption of deposits from First Financial and the corresponding increase in transaction volume driving interchange and service fee income.  Earnings on bank owned life insurance were higher in 2015 due to the acquisition of $10.8 million of life insurance policies in the first quarter of 2015 from First Financial.  Net gains on sales of securities declined to $50,000 for the first nine months of 2015 compared to $468,000 in 2014 while sales of securities also decreased to $38.9 million from $43.7 million over the respective periods.  Most of the securities sold were acquired from First Financial and were disposed shortly after acquisition resulting in minimal fluctuation between the acquisition date fair value and disposition.  The Company sold securities to conform the merged portfolio to policy and investment strategy.

 

Non-interest expense.  Non-interest expense increased to $12.7 million for the three months ended September 30, 2015 from $6.9 million in 2014 due to increases salaries and employee benefits, occupancy expenses, data processing, amortization of intangible assets, foreclosed assets, net, and other expenses.  Salaries and employee benefits was $5.6 million in 2015 compared to $3.9 million in 2014 and is attributable to an increase in employees associated with the acquisition of First Financial as well as increased stock based compensation expense.  Total full time equivalent employees increased to 349 as of September 30, 2015 from 203 at September 30, 2014 with corresponding increases in compensation, insurance expense, taxes, and other benefits.  Occupancy expense was $2.1 million in 2015, an increase from $638,000 in 2014 as the number of branches operated by the Company increased to 41 as a result of the First Financial acquisition with corresponding increases to rent expense, depreciation, and utilities.  Additionally, the Company entered into an agreement to sublease one of its branch locations to a third party and recorded a charge of $972,000 related to the transaction in the third quarter of 2015.  Data processing expense was $1.6 million for the third quarter of 2015 as compared to $618,000 in 2014 and was primarily driven by charges for core processing which is based, in part, on the number of loan and deposit accounts.  Also, the Company recognized data processing charges of $413,000 in the quarter associated with the conversion and merger of its subsidiary, The Scott County State Bank, into Your Community Bank.  Amortization of intangible assets was $312,000 in 2015, an increase from $80,000 in 2014 due the acquisition of $5.7 million in core deposit intangible assets associated with the First Financial transaction.  Foreclosed assets, net expense was $119,000 in 2015 compared to $(148,000) in 2014 due to an increase in expenses including property taxes and maintenance, offset by an increase in rental income from foreclosed properties and decrease net gains recorded during the quarter.  Other expenses were $1.1 million in 2015, an increase from $561,000 as the Company recognized increases in expense associated with communication lines, printing, and other taxes and assessments.

 

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Non-interest expense was $41.1 million for the nine months ended September 30, 2015, an increase of $21.1 million from $19.9 million in 2014 as all categories were impacted by the acquisition of First Financial and the corresponding merger and integration charges.  Salaries and employee benefits rose to $19.8 million for 2015 from $10.6 million in 2014 due to the increase in full time equivalent employees to 349 as of September 30, 2015 from 210 at December 31, 2014.  Additionally, the Company incurred $2.2 million of expense in the first nine months associated for severance and change in control payments and $1.1 million in stock based compensation.  Occupancy expense was $5.0 million in 2015 compared to $1.9 million in 2014 as the Company acquired additional branches in the First Financial transaction and recognized $1.3 million in merger and integration expenses in 2015, including a $972,000 charge associated with the aforementioned sublease of a branch.  Data processing expense increased to $4.3 million for the first nine months of 2015 from $1.9 million in 2014 as the Company converted core processing during the period for First Financial as well as The Scott County State Bank and incurred contract cancellation fees for other redundant services.  Of the total data processing expense recognized during 2015, $1.2 million was from merger and integration expenses including contract termination penalties.  Legal and professional service expenses were $3.2 million for 2015 compared to $1.8 million in 2014 as the Company incurred legal services associated with the acquisition of First Financial and the merger of The Scott County State Bank and related filing requirements, valuation services, consulting fees for integration, and $200,000 in contract termination charges for redundant services.  The acquisition of First Financial also attributed to the increase in amortization of intangible assets to $1.0 million for the nine months ended September 30, 2015 compared to $244,000 for the same period in 2014.  Other expenses increased to $4.3 million in 2015 from $1.7 million in 2014 as the Company incurred additional advertising and marketing expenses, fees and other tax assessments, and charitable contributions during the period.

 

Income tax expense.  Income tax expense was $334,000 for the third quarter of 2015 compared to $534,000 for the equivalent period in 2014 while the effective tax rate was 7.86% and 18.74% for the respective periods.  The reduction in income tax expense and effective rate in 2015 was primarily due the tax-exempt gain on recognition of life insurance benefit of $835,000 recorded in 2015.

 

Income tax benefit for the nine months ended September 30, 2015 was $493,000 compared to income tax expense of $1.4 million in 2014.  The reduction in income tax expense was due to lower proportional growth in pre-tax income compared to tax preference items recognized during 2015.  Pre-tax income was reduced due to $5.3 million in merger and integration charges incurred during the period while the Company’s tax preference items increased due to acquired tax credits of $438,000, non-taxable income related to the aforementioned gain on recognition of life insurance benefit, an increase in bank owned life insurance earnings of $230,000, and tax exempt investment income of $382,000.

 

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Liquidity and Capital Resources Liquidity levels are adjusted in order to meet funding needs for deposit outflows, repayment of borrowings, and loan commitments and to meet asset/liability objectives.  Our primary sources of funds are customer deposits, customer repurchase agreements, proceeds from loan repayments, maturing securities and FHLB advances.  While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition.  At September 30, 2015, we had cash and interest-bearing deposits with banks of $40.4 million and securities available-for-sale with a fair value of $403.5 million.  If we require funds beyond the funds we are able to generate internally, we have $16.0 million in additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis based on our current FHLB stock holdings, unused federal funds lines of credit with various nonaffiliated financial institutions of $22.0 million.  Management believes the Company’s liquidity sources are adequate to meet its operational needs.

 

The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements.  As of September 30, 2015, Your Community Bank was considered well capitalized under regulatory capital requirements and was in compliance with all regulatory capital requirements that were effective as of such date with capital ratios as follows:

 

September 30, 2015:

 

 

 

Tier 1 Capital
to Total
Average
Assets

 

Common
Equity Tier 1
Capital to
Risk-Adjusted
Total Assets

 

Tier 1 Capital
to Risk-
Adjusted
Total Assets

 

Total Capital
to Risk-
Adjusted
Total Asset

 

Consolidated

 

10.1

%

10.9

%

15.2

%

15.8

%

Your Community Bank

 

10.9

%

15.0

%

15.0

%

15.6

%

 

 

 

 

 

 

 

 

 

 

Minimum for banks to be well capitalized under regulatory capital requirements:

 

5.0

%

6.5

%

8.0

%

10.0

%

 

December 31, 2014:

 

 

 

Total
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Average
Assets

 

Consolidated

 

18.7

%

17.7

%

13.0

%

Your Community Bank

 

18.1

%

17.1

%

12.9

%

Scott County State Bank

 

17.3

%

16.3

%

9.9

%

 

 

 

 

 

 

 

 

Minimum for banks to be well capitalized under regulatory capital requirements:

 

10.0

%

6.0

%

5.0

%

 

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We have been repurchasing shares of our common stock since May 21, 1999.  A net total of 369,510 shares at an aggregate cost of $6.4 million have been repurchased since that time under both the current and prior repurchase plans.  Our Board of Directors authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of our common stock may be purchased.  Through September 30, 2015, a total of $1.6 million had been expended to purchase 85,098 shares under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”).  Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period.  Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

 

During June 2004 and 2006, we completed placements of $7.0 million and $10.0 million floating rate subordinated debentures through Community Bank Shares (IN) Statutory Trust I and Trust II, (trusts we formed), respectively.  These securities are reported as liabilities for financial reporting, but Tier 1 Capital for regulatory purposes.  We used the proceeds for general business purposes and to support our future opportunities for growth.  The Company assumed subordinated debentures of $15.8 million in its acquisition of First Financial, net of appropriate purchase accounting adjustments.  In June 2008, First Financial completed the placement of $8.0 million subordinated debentures with a maturity date of June 24, 2038, callable at par in whole or in part on or after June 24, 2018, and which pay a fixed interest rate of 8.00% for thirty years.  In March 2007, First Financial completed the placement of $10.0 million cumulative subordinated debentures at a 10-year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points. These securities mature on March 22, 2037, and can be called at par in whole or in part on or after March 15, 2017.

 

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Off Balance Sheet Arrangements and Contractual Obligations

 

The Company uses off balance sheet financial instruments, such as commitments to make loans, credit lines and letters of credit to meet customer financing needs. These agreements provide credit or support the credit of others and usually have expiration dates but may expire without being used. In addition to credit risk, the Company also has liquidity risk associated with these commitments as funding for these obligations could be required immediately. The contractual amount of these financial instruments with off balance sheet risk was as follows at September 30, 2015:

 

 

 

(In thousands)

 

Commitments to make loans

 

$

23,161

 

Unused lines of credit

 

208,784

 

Standby letters of credit

 

2,255

 

Total

 

$

234,200

 

 

Aggregate Contractual Obligations

 

As of September 30, 2015:
(Dollars in thousands)

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

Time deposits

 

$

326,937

 

$

194,973

 

$

80,136

 

$

23,274

 

$

28,554

 

Short-term borrowings

 

74,034

 

74,034

 

 

 

 

Other borrowings

 

93,974

 

41,786

 

14,948

 

3,934

 

33,306

 

Defined benefit plan

 

888

 

274

 

116

 

161

 

337

 

Lease commitments

 

7,257

 

1,221

 

1,652

 

1,144

 

3,240

 

Total

 

$

503,090

 

$

312,288

 

$

96,852

 

$

28,513

 

$

65,437

 

 

Time deposits represent certificates of deposit held by the Company.

 

Short-term borrowings consist of repurchase agreements of $44.0 million, overnight federal funds purchased of $30.5 million and a note payable of $32,000.  The note payable represents amounts due for the participation in construction of a low income housing development project and is payable on demand.

 

Other borrowings consist of FHLB advances of $52.1 million, subordinated debentures of $32.8 million, and a term loan of $9.0 million.  FHLB advances represent the amounts that are due from the FHLB and consist of fixed rate advances.  Subordinated debentures represent the scheduled maturities of subordinated debentures issued to trusts formed by the Company in connection with the issuance of trust preferred securities. The term loan represents the scheduled maturities of holding company debt.

 

The defined benefit plan represents expected benefit payments to be paid to participants.

 

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PART I - ITEM 3

 

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

 

Lease commitments represent the total minimum lease payments under noncancelable operating leases, before considering renewal options that generally are present.

 

Asset/liability management is the process of balance sheet control designed to ensure safety and soundness and to maintain liquidity and regulatory capital standards while maintaining acceptable net interest income.  Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates.  Management continually monitors interest rate and liquidity risk so that it can implement appropriate funding, investment, and other balance sheet strategies.  Management considers market interest rate risk to be our most significant ongoing business risk consideration.

 

We currently contract with an independent third party consulting firm to measure our interest rate risk position.  The consulting firm utilizes an earnings simulation model to analyze net interest income sensitivity.  Current balance sheet amounts, current yields and costs, corresponding maturity and repricing amounts and rates, other relevant information, and certain assumptions made by management are combined with gradual movements in interest rates of 200 basis points up at December 31, 2014 and September 30, 2015 within the model to estimate their combined effects on net interest income over a one-year horizon.  In 2008, the Federal Open Market Committee lowered its target for the federal funds rate to 0-25 bps.  A majority of our loans are indexed to the prime rate, therefore, the Company has excluded an evaluation of the effect on net interest income assuming a decrease in interest rates as further reductions in the prime rate are extremely unlikely.  We feel that using gradual interest rate movements within the model is more representative of future rate changes than instantaneous interest rate shocks.  Growth in amounts are not projected for any balance sheet category when constructing the model because of the belief that projected growth can mask current interest rate risk imbalances over the projected horizon.  We believe that the changes made to the model’s interest rate risk measurement process have improved the accuracy of results of the process, consequently giving better information on which to base asset and liability allocation decisions going forward.

 

Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are incorporated into the model.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.  We continually monitor and update the assumptions as new information becomes available.  Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, and actual variations from the managerial assumptions utilized under the model, as well as changes in market conditions and the application and timing of various management strategies.

 

The base scenario represents projected net interest income over a one year forecast horizon exclusive of interest rate changes to the simulation model.  Given a gradual 200 basis point increase in the projected yield curve used in the simulation model (Up 200 Scenario), we estimated that as of September 30, 2015 our net interest income would decrease by an estimated 1.3%, or $680,000, over the one year forecast horizon.  As of December 31, 2014, in the Up 200 Scenario we estimated that net interest income would decrease $349,000, over a one year forecast horizon ending December 31, 2015.

 

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The projected results are within our asset/liability management policy limits which states that the negative impact to net interest income should not exceed 7% in a 100 or 200 basis point increase or decrease in the projected yield curve over a one year forecast horizon.  The forecast results are heavily dependent on the assumptions regarding changes in deposit rates; we can minimize the reduction in net interest income in a period of rising interest rates to the extent that we can curtail raising deposit rates during this period.  We continue to explore transactions and strategies to both increase our net interest income and minimize our interest rate risk.

 

Our interest sensitivity profile at any point in time will be affected by a number of factors.  These factors include the mix of interest sensitive assets and liabilities as well as their relative repricing schedules.  It is also influenced by market interest rates, deposit growth, loan growth, and other factors.  The tables below illustrate our estimated annualized earnings sensitivity profile based on the above referenced asset/liability model as of September 30, 2015 and December 31, 2014, respectively.  The tables below are representative only and are not precise measurements of the effect of changing interest rates on our net interest income in the future.

 

The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of September 30, 2015 and ending on September 30, 2016:

 

 

 

Interest Rate Sensitivity as of September 30,
2015:

 

 

 

Base

 

Gradual Increase in
Rates of 200
Basis Points

 

 

 

(In thousands)

 

Projected interest income:

 

 

 

 

 

Loans

 

$

49,064

 

$

51,204

 

Investments

 

9,588

 

9,799

 

FHLB and FRB stock

 

125

 

125

 

Interest-bearing deposits in other financial institutions

 

26

 

109

 

Total interest Income

 

58,803

 

61,237

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

Deposits

 

2,179

 

4,327

 

Short-term borrowings

 

170

 

974

 

Other borrowings

 

2,920

 

3,082

 

Total interest expense

 

5,269

 

8,383

 

Net interest income

 

$

53,534

 

$

52,854

 

 

 

 

 

 

 

Change from base

 

 

 

(680

)

Percent change from base

 

 

 

(1.3

)%

 

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The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of December 31, 2014 and ending December 31, 2015:

 

 

 

Interest Rate Sensitivity as of December 31, 2014

 

 

 

Base

 

Gradual Increase in
Rates of 200
Basis Points

 

 

 

(In thousands)

 

Projected interest income:

 

 

 

 

 

Loans

 

$

28,824

 

$

29,858

 

Investments

 

5,249

 

5,319

 

FHLB and FRB stock

 

161

 

161

 

Interest-bearing deposits in other financial institutions

 

7

 

31

 

Total interest income

 

34,241

 

35,369

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

Deposits

 

891

 

1,660

 

Short-term borrowing

 

96

 

596

 

Other borrowings

 

1,330

 

1,538

 

Total interest expense

 

2,317

 

3,794

 

Net interest income

 

$

31,924

 

$

31,575

 

 

 

 

 

 

 

Change from base

 

 

 

$

(349

)

% Change from base

 

 

 

(1.1

)%

 

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Table of Contents

 

PART I — ITEM 4

 

CONTROLS AND PROCEDURES

 

With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Your Community Bankshares, Inc. (“YCBI”), YCBI’s management has evaluated the effectiveness of YCBI’s disclosure controls and procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, YCBI’s Chief Executive Officer and Chief Financial Officer have concluded that YCBI’s disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by YCBI in the reports that it 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.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by YCBI in the reports that it files or submits under the Exchange Act is accumulated and communicated to YCBI’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in YCBI’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, YCBI’s internal control over financial reporting.

 

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Table of Contents

 

PART II

 

OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There are various claims and lawsuits in which the Company or its subsidiaries are periodically involved, such as claims to enforce liens, foreclosure or condemnation proceedings on properties in which the Banks hold mortgages or security interests, claims involving the making and servicing of real property loans and other issues incidental to the Banks’ business.  In the opinion of management, no material loss is expected from any such pending claims or lawsuits.

 

Item 1A.  Risk Factors

 

In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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

 

The Company did not purchase its common shares during the nine months ended September 30, 2015.

 

The Board of Directors of the Company authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of the Company’s common stock can be purchased.  As of September 30, 2015, the Company could repurchase up to $3.4 million of the Company’s common stock under the current repurchase plan.  As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”).  Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period.  Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

 

Item 6.  Exhibits

 

Exhibits

 

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index of this Form 10-Q and are filed as a part of this report.

 

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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 by the undersigned thereunto duly authorized.

 

 

 

YOUR COMMUNITY BANKSHARES, INC.

 

 

(Registrant)

 

 

 

 

Dated: 

November 9, 2015

 

BY:

/s/ James D. Rickard

 

 

 

James D. Rickard

 

 

 

President and

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

Dated: 

November 9, 2015

 

BY:

/s/ Paul. A. Chrisco

 

 

 

Paul A. Chrisco

 

 

 

Executive Vice-President and

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

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EXHIBIT INDEX

YOUR COMMUNITY BANKSHARES, INC.

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101*

 

The following financial information from Your Community Bankshares, Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2015, filed with the SEC on November 9, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and September 30, 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014 (iv) Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2015, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014 and (vi) Notes to Consolidated Financial Statements.

 


*Pursuant to Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 of the Securities Act of 1933 and Section 12 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

 

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