Exhibit 99.3

 

 

 

 

 

Interim Consolidated Financial Statements (Unaudited) at September 30, 2015 and for the Nine Months Ended September 30, 2015 and 2014
Consolidated Statements of Financial Condition September 30, 2015 (unaudited) and December, 31 2014			F-44
Consolidated Statements of Operations September 30, 2015 (unaudited) and December, 31 2014			F-45
Consolidated Statement of Comprehensive Income September 30, 2015 (unaudited) and December, 31 2014			F-46
Consolidated Statements of Stockholders’ Equity September  30, 2015 (unaudited) and December, 31 2014			F-47
Consolidated Statements of Cash Flows September 30, 2015 (unaudited) and December, 31 2014			F-48
Notes to Consolidated Financial Statements			F-50

 

 

 

 

 

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

September 30, 2015 (Unaudited) and December 31, 2014

(Dollars in Thousands)

 

		September 30, 2015				December 31, 2014
ASSETS
Cash and due from banks		$	15,772			$	11,093
Federal funds sold			3,695				—
Total cash and cash equivalents			19,467				11,093
Time deposits in other banks			2,250				2,000
Investment securities:
Available-for-sale, at fair value			78,032				74,283
Held-to-maturity, at amortized cost (fair value of $2,605 in 2015 and $2,638 in 2014)			2,368				2,371
Restricted, at cost			3,736				4,228
Loans, net of allowance for losses of $7,866 in 2015 and $7,874 in 2014			487,431				473,789
Other real estate owned (OREO)			495				1,810
Premises and equipment, net			11,935				11,461
Accrued interest receivable			1,849				1,736
Bank owned life insurance			10,138				9,900
Deferred tax asset			3,834				4,115
Other assets			1,718				1,752
Total assets		$	623,253			$	598,538
LIABILITIES
Deposits
Noninterest-bearing		$	97,922			$	70,770
Interest-bearing			422,606				408,737
Total deposits			520,528				479,507
Securities sold under repurchase agreements			—				1,761
Federal funds purchased			—				6,318
Subordinated debt and trust preferred			9,987				11,559
Federal Home Loan Bank advances			35,000				45,000
Accrued expenses and other liabilities			4,367				4,741
Total liabilities			569,882				548,886
STOCKHOLDERS’ EQUITY
Preferred stock (Note 10)			—				—
Common stock (Note 11)			129				128
Additional paid-in capital			48,713				48,569
Retained earnings			4,269				1,020
Accumulated other comprehensive income (loss), net of tax			260				(65	)
Total stockholders’ equity			53,371				49,652
Total liabilities and stockholders’ equity		$	623,253			$	598,538

See notes to consolidated financial statements.

 

F-44

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

(Dollars in Thousands, except per share data)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Interest and dividend income
Loans		$	6,148			$	5,822			$	18,065			$	16,918
Investments:
Taxable interest income			297				341				884				1,064
Tax exempt interest income			42				28				100				103
Dividends			53				46				151				140
Interest bearing deposits			17				10				52				21
Total interest and dividend income			6,557				6,247				19,252				18,246
Interest expense
Deposits			998				1,073				2,945				3,235
FHLB advances			166				113				483				315
Subordinated debt and other borrowings			82				124				280				369
Total interest expense			1,246				1,310				3,708				3,919
Net interest income			5,311				4,937				15,544				14,327
Recovery of provision for loan losses			—				(60	)			(145	)			(352	)
Net interest income after recovery of provision for loan losses			5,311				4,997				15,689				14,679
Noninterest income
Fees on deposits			78				87				226				254
Gain on sale of securities			48				81				120				352
Gain on sale of loans			—				—				—				55
Other			398				263				981				719
Total noninterest income			524				431				1,327				1,380
Noninterest expense
Salaries and employee benefits			2,291				2,171				6,477				6,584
Occupancy expense			201				217				621				635
Data processing			240				236				771				708
Professional services			121				99				419				357
Advertising and marketing			130				126				360				381
FDIC assessment			93				93				275				273
Virginia franchise tax (benefit)			(57	)			135				197				389
(Gain) Loss on sale and write down of OREO, net			—				(16	)			140				(93	)
Depreciation			210				161				602				444
Other operating expenses			721				499				1,984				1,767
Total noninterest expense			3,950				3,721				11,846				11,445
Net income before income taxes			1,885				1,707				5,170				4,614
Income tax expense			606				556				1,662				1,477
Net income			1,279				1,151				3,508				3,137
Effective dividend on preferred stock			—				—				—				24
Net income available to common stockholders		$	1,279			$	1,151			$	3,508			$	3,113
Basic net income per common share (Note 3)		$	0.10			$	0.09			$	0.28			$	0.25
Diluted net income per common share (Note 3)		$	0.09			$	0.08			$	0.24			$	0.21

See notes to consolidated financial statements.

 

F-45

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in Thousands)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net income		$	1,279			$	1,151			$	3,508			$	3,137
Other comprehensive income (loss):
Investment securities:
Unrealized (losses) gains on investment securities available for sale			442				(207	)			592				802
Tax effect			(152	)			68				(188	)			(275	)
Reclassification of gains recognized in net income			(48	)			(81	)			(120	)			(352	)
Tax effect			16				27				41				119
Total other comprehensive income (loss)			258				(193	)			325				294
Comprehensive income		$	1,537			$	958			$	3,833			$	3,431

See notes to consolidated financial statements

 

F-46

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

(Dollars in Thousands)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings (Accumulated Deficit)				Discount on Preferred Stock				Accumulated Other Comprehensive Income (Loss)				Total
Balances December 31, 2013		$	22			$	50,208			$	4,448			$	(4,590	)		$	(16	)		$	(390	)		$	49,682
Net income			—				—				—				3,137				—				—				3,137
Other comprehensive income			—				—				—				—				—				294				294
Preferred stock dividend			—				—				—				(8	)			—				—				(8	)
Accretion of discount on preferred stock			—				—				—				(16	)			16				—				—
Stock based compensation			—				—				253				—				—				—				253
Redemption of preferred stock			(22	)			—				(5,509	)			—				—				—				(5,531	)
Change in par value							(50,083	)			48,837				1,246
Exercise of warrants issued in connection with rights offering			—				2				427				—				—				—				429
Issuance of 98 thousand shares of restricted common stock			—				1				(1	)			—				—				—				—
Balances September 30, 2014		$	—			$	128			$	48,455			$	(231	)		$	—			$	(96	)		$	48,256
Balances December 31, 2014		$	—			$	128			$	48,569			$	1,020			$	—			$	(65	)		$	49,652
Net income			—				—				—				3,508				—				—				3,508
Other comprehensive income			—				—				—				—				—				325				325
Stock based compensation			—				—				304				—				—				—				304
Repurchase of common stock			—				—				(182	)			—				—				—				(182	)
Exercise of rights offering warrants			—				—				23				—				—				—				23
Payments of dividends			—				—				—				(259	)			—				—				(259	)
Issuance of 94 thousand shares of restricted common stock			—				1				(1	)			—				—				—				—
Balances September 30, 2015		$	—			$	129			$	48,713			$	4,269			$	—			$	260			$	53,371

See notes to consolidated financial statements

 

F-47

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(Unaudited)

(Dollars in Thousands)

 

		2015				2014
Cash flows from operating activities
Net income		$	3,508			$	3,137
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery of provision for loan losses			(145	)			(352	)
Depreciation of premises and equipment			602				444
Net amortization of bond premiums/discounts			537				481
Stock based compensation expense			304				253
Deferred income tax expense			134				1,062
Gain on sale of securities			(120	)			(352	)
Gain on loans sold			—				(55	)
Loss (gain) on sale and write down of OREO, net			140				(93	)
Increase in cash surrender value of bank owned life insurance			(238	)			(242	)
Proceeds from sale of loans held for sale			—				7,167
Origination of loans held for sale			—				(6,120	)
Decrease (increase) in other assets			34				(322	)
Increase in accrued interest receivable			(113	)			(70	)
Decrease in accrued expenses and other liabilities			(374	)			(500	)
Net cash provided by operating activities			4,269				4,438
Cash flows from investing activities
Proceeds from paydowns of securities available-for-sale			9,327				8,592
Purchase of securities available-for-sale			(26,271	)			(31,319	)
Proceeds from sale of securities available-for-sale			13,253				18,513
Proceeds from sale of OREO			1,275				1,013
Improvements in OREO			(100	)			(256	)
Proceeds from sale of equipment			51				—
Redemption (purchase) of Federal Home Loan Bank (FHLB) Stock, net			492				(291	)
Purchase of Federal Reserve Stock			—				(158	)
Purchase of time deposits in other banks			(250	)			—
Payment of stock dividend			(259	)			—
Purchases of premises and equipment			(1,127	)			(693	)
Net increase in loans			(13,497	)			(37,361	)
Net cash used in investing activities			(17,106	)			(41,960	)
Cash flows from financing activities
Net increase in deposits			41,021				32,216
FHLB advances			32,000				20,000
FHLB advance repayments			(42,000	)			(10,000	)
Federal funds purchased, net			(6,318	)			—
Dividends on preferred stock			—				(8	)
Cash paid for redemption of common stock warrants and preferred stock, net of expenses			—				(5,531	)
Proceeds from issuance of subordinated debt			—				6,500
Repurchase of common stock			(182	)			—
Repayment of subordinated debt			(1,572	)			(2,072	)
Warrants exercised in connection with the rights offering			23				429
Net (decrease) increase in repurchase agreements			(1,761	)			7,555
Net cash provided by financing activities			21,211				49,089
Net increase in cash and cash equivalents			8,374				11,567
Cash and cash equivalents, beginning of period			11,093				14,187
Cash and cash equivalents, end of period		$	19,467			$	25,754

 

F-48

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(Dollars in Thousands)

(Unaudited)

(Continued)

 

		2015				2014
		(Unaudited)
		(Dollars in thousands)
Supplemental disclosure of cash flow information
Interest paid during the period		$	3,705			$	3,919
Taxes paid during the period		$	1,470			$	410

See notes to consolidated financial statements

 

F-49

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Note 1 – Basis of Presentation

First Capital Bancorp, Inc. (the Company) is the holding company of and successor to First Capital Bank (the Bank). In 2006, the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction pursuant to an Agreement and Plan of Reorganization dated September 5, 2006, between the Company and the Bank (the Agreement). Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of the Company’s common stock on a one-for-one basis. As a result, the Bank became a wholly owned subsidiary of the Company, the Company became the holding company of the Bank and the stockholders of the Bank became stockholders of the Company.

The Company conducts all of its business activities through the branch offices of the Bank. The Bank created RE1, LLC, and RE2, LLC, wholly owned Virginia limited liability companies, for the sole purpose of taking title to property acquired in lieu of foreclosure. RE1, LLC, and RE2, LLC have been consolidated with the Bank. The Company exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and such other subsidiaries that it may acquire or establish.

The Company has one other wholly owned subsidiary, FCRV Statutory Trust 1 (the Trust), a Delaware Business Trust that was formed in connection with the issuance of trust preferred debt in 2006. Pursuant to current accounting standards, the Company does not consolidate the Trust.

The consolidated financial statements include the accounts of First Capital Bancorp, Inc. and its wholly owned subsidiary, First Capital Bank. All material intercompany balances and transactions have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of September 30, 2015, and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America (GAAP). Results for the three and nine-month periods ended September 30, 2015, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.

The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the consolidated financial statements of the Company as of and for the year ended December 31, 2014, filed as part of the Company’s annual report on Form 10-K. These interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.

Certain reclassifications have been made to amounts presented in the prior period consolidated financial statements to conform to the current period presentation.

Note 2 – Use of Estimates

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results may be different. In particular, the allowance for loan losses, valuation of other real estate owned, income taxes, and fair values of financial instruments are subject to change.

Note 3 – Earnings per common share

Basic earnings per share (EPS) excludes potential dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock that have a dilutive impact on shares outstanding were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the Company.

 

F-50

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The basic and diluted EPS calculations are as follows:

 

		Three Months Ended September 30, (in thousands, except per share amounts)								Nine Months Ended September 30, (in thousands, except per share amounts)
		2015				2014				2015				2014
Net income available to common stockholders		$	1,279			$	1,151			$	3,508			$	3,113
Weighted average number of shares outstanding			12,636				12,568				12,638				12,513
Net income per common share – basic		$	0.10			$	0.09			$	0.28			$	0.25
Effect of dilutive securities:
Weighted average number of common shares outstanding			12,636				12,568				12,638				12,513
Effect of stock options, warrants and restricted stock			2,340				2,442				2,227				2,415
Diluted average common shares outstanding			14,976				15,010				14,865				14,928
Net income per common share – diluted		$	0.09			$	0.08			$	0.24			$	0.21

For the three and nine months ended September 30, 2015, the Company has excluded options convertible into 2 and 29 thousand shares of common stock, respectively, from the calculation of diluted earnings per share because they were anti-dilutive.

For the three and nine months ended September 30, 2014, the Company excluded options convertible into 31 thousand shares of common stock from the calculation of diluted earnings per share because they were anti-dilutive.

Note 4 – Stock-Based Compensation

Accounting standards require the Company to measure compensation cost for the type of stock-based awards the Company issues at fair value on the date of grant and recognize compensation expense in the consolidated statements of operations over the service period that the awards are expected to vest.

Stock-based compensation expense during the three and nine months ended September 30, 2015 was $110 thousand and $304 thousand, respectively, and the amount expensed during the three and nine months ended September 30, 2014, was $95 thousand and $253 thousand, respectively. Stock-based compensation is included in salaries and employee benefits in the accompanying consolidated statements of operations.

Note 5 – Investment Securities

The amortized costs, gross unrealized gains, gross unrealized losses, and fair values for securities are as follows:

 

		September 30, 2015
		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
		(Dollars in thousands)
Available-for-sale
Mortgage-backed securities		$	26,636			$	213			$	28			$	26,821
Corporate bonds			2,501				—				38				2,463
Collateralized mortgage obligation (CMO) securities			21,876				202				14				22,064
State and political subdivisions – taxable			16,024				123				60				16,087
State and political subdivisions – tax exempt			4,059				13				14				4,058
SBA pools			6,552				15				28				6,539
		$	77,648			$	566			$	182			$	78,032

 

F-51

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		December 31, 2014
		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
		(Dollars in thousands)
Available-for-sale
Mortgage-backed securities		$	29,447			$	190			$	73			$	29,564
Corporate bonds			3,502				8				12				3,498
Collateralized mortgage obligation (CMO) securities			19,686				196				91				19,791
State and political subdivisions – taxable			18,046				37				329				17,754
State and political subdivisions – tax exempt			—				—				—				—
SBA pools			3,690				3				17				3,676
		$	74,371			$	434			$	522			$	74,283

 

		September 30, 2015
		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
		(Dollars in thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,368			$	237			$	—			$	2,605
		$	2,368			$	237			$	—			$	2,605

 

		December 31, 2014
		Amortized Cost				Gross Unrealized								Fair Value
						Gains				Losses
		(Dollars in thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,371			$	267			$	—			$	2,638
		$	2,371			$	267			$	—			$	2,638

The following table summarizes securities with unrealized losses at September 30, 2015, and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position. The unrealized losses are largely due to changes in interest rates and other market conditions. At September 30, 2015, 36 out of 125 securities the Company held had fair values less than amortized cost, primarily in municipal securities. At December 31, 2014, 55 out of 111 securities the Company held had fair values less than amortized cost, primarily in municipal and mortgage-backed securities. All unrealized losses are considered by management to be temporary given investment security credit ratings, the intent and ability to retain these securities for a period of time sufficient to recover all unrealized losses, and because it is unlikely that the Company will be required to sell the impaired securities before their anticipated recovery. As such, management’s assessment of other than temporary impairment (OTTI) for the quarter ended September 30, 2015, resulted in no recognition of an impairment loss.

 

		September 30, 2015
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Dollars in thousands)
Assets:
Mortgage-backed securities		$	3,967			$	17			$	714			$	11			$	4,681			$	28
Corporate bonds			—				—				2,463				38				2,463				38
CMO securities			3,421				8				1,644				6				5,065				14
State and political subdivisions-taxable			3,356				33				4,481				27				7,837				60
State & political subdivisions-tax exempt			3,208				14				—				—				3,208				14
SBA Pools			2,969				23				1,444				5				4,413				28
All securities		$	16,921			$	95			$	10,746			$	87			$	27,667			$	182

 

F-52

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		December 31, 2014
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Dollars in thousands)
Assets:
Mortgage-backed securities		$	9,722			$	30			$	4,236			$	43			$	13,958			$	73
Corporate bonds			998				5				1,492				7				2,490				12
CMO securities			6,568				34				3,542				57				10,110				91
State and political subdivisions-taxable			8,074				79				6,728				250				14,802				329
SBA Pools			2,686				17				—				—				2,686				17
All securities		$	28,048			$	165			$	15,998			$	357			$	44,046			$	522

Restricted investment securities consist primarily of Federal Home Loan Bank of Atlanta (FHLB) stock in the amount of $2.0 and $2.5 million as of September 30, 2015, and December 31, 2014, respectively, and Federal Reserve Bank stock in the amount of $1.6 million at September 30, 2015, and December 31, 2014. Restricted equity securities are carried at cost because there is no ability to resell these securities. The FHLB requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Company’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 3% of the Company’s outstanding capital.

Mortgage-backed securities with a fair value of approximately $1.8 million were pledged as collateral at December 31, 2014, respectively, to secure overnight repurchase agreements.

Note 6 – Loans

Major classifications of loans are as follows:

 

		September 30, 2015				December 31, 2014
		(Dollars in thousands)
Real estate
Residential		$	141,822			$	145,241
Commercial			167,643				182,718
Residential Construction			43,102				32,184
Other Construction, Land Development & Other Land			70,035				52,937
Commercial			70,861				66,868
Consumer			1,910				1,886
Total loans			495,373				481,834
Less:
Allowance for loan losses			7,866				7,874
Net deferred fees			76				171
Loans, net		$	487,431			$	473,789

A summary of risk characteristics by loan portfolio classification follows:

Real Estate – Residential – This portfolio primarily consists of investor loans secured by properties in the Bank’s normal lending area. These investor loans are typically five year rate adjustment loans and they generally have an original loan-to-value (LTV) of 80% or less. This category also includes home equity lines of credit (HELOC). The HELOCs generally have an adjustable rate tied to prime rate and a term of 10 years. Multifamily residential real estate is moderately seasoned and is generally secured by properties in the Bank’s normal lending area.

 

F-53

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Real Estate – Commercial – This portfolio consists of nonresidential improved real estate, which includes shopping centers and office buildings. These properties are generally located in the Bank’s normal lending area. This category of loans has a higher than average level of risk because its performance is impacted by market forces over a longer time horizon.

Real Estate – Residential Construction – These loans are located in the Bank’s normal lending area. Although it has represented a growth area for the portfolio, this category also has a higher level of risk due to inherent market change and construction risks.

Real Estate – Other Construction, Land Development and Other Land Loans – This portfolio includes developed residential and commercial lots held by developers as well as non-residential construction projects. This category has a higher level of risk due to inherent risks associated with market changes and construction.

Commercial – These loans include loans to businesses that are not secured by real estate. These loans are typically secured by accounts receivable, inventory, equipment, and other business assets. Commercial loans are typically granted to local businesses that have a strong track record of profitability and performance.

Consumer – Loans in this portfolio are either unsecured or secured by assets such as automobiles or marketable securities. They are generally granted to local customers that have a banking relationship with the Bank.

Activity in the allowance for loan losses for the nine months ended is as follows:

 

		September 30,
		2015				2014
		(Dollars in thousands)
Balance, beginning of period		$	7,874			$	8,165
Recovery of provision for loan losses			(145	)			(352	)
Recoveries			190				752
Charge-offs			(53	)			(662	)
Balance, end of period		$	7,866			$	7,903
Ratio of allowance for loan losses as a percent of total loans outstanding at the end of the period			1.59	%			1.69	%

The following tables present activity in the allowance for loan losses by portfolio segment:

 

		Three Months Ended
		Real Estate
		Residential				Commercial				Residential Construction				Other Construction Land Devel. & Other Land				Commercial				Consumer				Total
		(Dollars in thousands)
Balance, July 1, 2015		$	2,079			$	2,736			$	1,115			$	812			$	1,108			$	15			$	7,865
(Provision for) recovery of loan losses			17				(95	)			84				90				(95	)			(1	)			—
Recoveries			15				—				1				1				3				—				20
Charge-offs			(19	)			—				—				—				—				—				(19	)
Balance, September 30, 2015		$	2,092			$	2,641			$	1,200			$	903			$	1,016			$	14			$	7,866
Balance, July 1, 2014		$	2,783			$	2,901			$	624			$	619			$	953			$	14			$	7,894
(Provision for) recovery of loan losses			7				(251	)			144				(16	)			57				(1	)			(60	)
Recoveries			42				212				16				—				4				—				274
Charge-offs			(110	)			—				(50	)			—				(45	)			—				(205	)
Balance, September 30, 2014		$	2,722			$	2,862			$	734			$	603			$	969			$	13			$	7,903

 

F-54

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		Nine Months Ended
		Real Estate
		Residential				Commercial				Residential Construction				Other Construction Land Devel. & Other Land				Commercial				Consumer				Total
		(Dollars in thousands)
Balance, January 1, 2015		$	2,324			$	3,168			$	711			$	626			$	1,031			$	14			$	7,874
Provision for (recovery of) loan losses			(214	)			(527	)			485				175				(64	)			—				(145	)
Recoveries			35				—				4				102				49				—				190
Charge-offs			(53	)			—				—				—				—				—				(53	)
Balance, September 30, 2015		$	2,092			$	2,641			$	1,200			$	903			$	1,016			$	14			$	7,866
Balance, January 1, 2014		$	2,891			$	3,050			$	591			$	624			$	996			$	13			$	8,165
Provision for (recovery of) loan losses			343				(400	)			8				(21	)			(282	)			—				(352	)
Recoveries			54				212				185				—				301				—				752
Charge-offs			(566	)			—				(50	)			—				(46	)			—				(662	)
Balance, September 30, 2014		$	2,722			$	2,862			$	734			$	603			$	969			$	13			$	7,903

The charge off of uncollectible loans is determined on a case-by-case basis. Determination of a collateral shortfall, prospects for recovery, delinquency, and the financial resources of the borrower and any guarantor are all considered in determining whether to charge-off a loan. Closed-end retail loans that become past due 120 cumulative days from the contractual due date and open-end retail loans that become past due 180 cumulative days from the contractual due date will generally be charged off.

The following table presents the aging of unpaid loan principal:

 

		September 30, 2015
		30-89 Day Past Due				90+ Days Past Due and Accruing				Nonaccrual				Current				Total
		(Dollars in thousands)
Real estate
Residential		$	386			$	—			$	1,711			$	139,725			$	141,822
Commercial			985				—				162				166,496				167,643
Residential Construction			—				—				—				43,102				43,102
Other Construction, Land Development & Other Land			277				—				309				69,449				70,035
Commercial			—				—				49				70,812				70,861
Consumer			—				—				274				1,636				1,910
Total		$	1,648			$	—			$	2,505			$	491,220			$	495,373

 

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		December 31, 2014
		30-89 Day Past Due				90+ Days Past Due and Accruing				Nonaccrual				Current				Total
		(Dollars in thousands)
Real estate
Residential		$	77			$	—			$	1,560			$	143,604			$	145,241
Commercial			428				—				218				182,072				182,718
Residential Construction			—				—				—				32,184				32,184
Other Construction, Land Development & Other Land			—				—				1,360				51,577				52,937
Commercial			—				—				—				66,868				66,868
Consumer			—				—				292				1,594				1,886
Total		$	505			$	—			$	3,430			$	477,899			$	481,834

Loans are determined past due or delinquent based on the contractual terms of the loans. Payments past due 30 days or more are considered delinquent. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent, unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful or charged-off if a loss is considered imminent.

All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income when the loan is placed on nonaccrual status. Because of the uncertainty of the expected cash flows, the Company accounts for nonaccrual loans under the cost recovery method, under which all cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future collection of principal and interest are reasonably assured. The number of payments needed to meet this criteria varies from loan to loan. As a general rule, however, this criteria will be considered to have been met with the timely payment of six consecutive regularly scheduled monthly payments.

The following tables provide details of the Company’s loan portfolio by internally assigned grade:

 

		September 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(Dollars in thousands)
Real estate
Residential		$	138,329			$	677			$	2,816			$	—			$	—			$	141,822
Commercial			161,052				4,387				2,204				—				—				167,643
Residential Construction			43,102				—				—				—				—				43,102
Other Construction, Land Development & Other Land			67,773				84				2,178				—				—				70,035
Commercial			70,372				—				489				—				—				70,861
Consumer			1,636				—				274				—				—				1,910
Total		$	482,264			$	5,148			$	7,961			$	—			$	—			$	495,373

 

F-56

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		December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(Dollars in thousands)
Real estate
Residential		$	140,491			$	2,141			$	2,609			$	—			$	—			$	145,241
Commercial			176,063				3,098				3,557				—				—				182,718
Residential Construction			32,013				—				171				—				—				32,184
Other Construction, Land Development & Other Land			44,595				4,819				3,523				—				—				52,937
Commercial			65,915				598				355				—				—				66,868
Consumer			1,594				—				292				—				—				1,886
Total		$	460,671			$	10,656			$	10,507			$	—			$	—			$	481,834

These credit quality grades are defined as follows:

Pass – A “pass” rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special Mention – A “special mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A “substandard” asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified “doubtful” has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

Loss – Assets classified “loss” are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

 

F-57

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The following table provides details regarding impaired loans by segment and class:

 

		September 30, 2015												December 31, 2014
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
		(Dollars in thousands)
With no related allowance:
Real estate
Residential		$	1,971			$	2,439			$	—			$	1,826			$	2,359			$	—
Commercial			162				187				—				217				242				—
Residential Construction			—				—				—				—				—				—
Other Construction, Land Development & Other Land			309				818				—				6,180				9,080				—
Commercial			49				49				—				—				—				—
Consumer			274				396				—				292				396				—
Total		$	2,765			$	3,889			$	—			$	8,515			$	12,077			$	—
With an allowance:
Real estate
Residential		$	—			$	—			$	—			$	—			$	—			$	—
Commercial			—				—				—				—				—				—
Residential Construction			—				—				—				—				—				—
Other Construction, Land Development & Other Land			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total		$	—			$	—			$	—			$	—			$	—			$	—
Total
Real estate
Residential		$	1,971			$	2,439			$	—			$	1,826			$	2,359			$	—
Commercial			162				187				—				217				242				—
Residential Construction			—				—				—				—				—				—
Other Construction, Land Development & Other Land			309				818				—				6,180				9,080				—
Commercial			49				49				—				—				—				—
Consumer			274				396				—				292				396				—
Total		$	2,765			$	3,889			$	—			$	8,515			$	12,077			$	—

 

F-58

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The following table provides details of the balance of the allowance for loan losses and the recorded investment in financing receivables by impairment method for each loan portfolio segment:

 

		Real Estate
		Residential				Commercial				Residential Construction				Other Construction, Land Devel. & Other Land				Commercial				Consumer				Total
		(Dollars in thousands)
September 30, 2015
Allowance for loan losses, evaluated
Individually		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Collectively			2,092				2,641				1,200				903				1,016				14				7,866
Total ending allowance		$	2,092			$	2,641			$	1,200			$	903			$	1,016			$	14			$	7,866
Loans, evaluated
Individually		$	1,971			$	162			$	—			$	309			$	49			$	274			$	2,765
Collectively			139,851				167,481				43,102				69,726				70,812				1,636				492,608
Total ending loans		$	141,822			$	167,643			$	43,102			$	70,035			$	70,861			$	1,910			$	495,373
December 31, 2014
Allowance for loan losses, evaluated
Individually		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Collectively			2,324				3,168				711				626				1,031				14				7,874
Total ending allowance		$	2,324			$	3,168			$	711			$	626			$	1,031			$	14			$	7,874
Loans, evaluated
Individually		$	1,826			$	217			$	—			$	6,180			$	—			$	292			$	8,515
Collectively			143,415				182,501				32,184				46,757				66,868				1,594				473,319
Total ending loans		$	145,241			$	182,718			$	32,184			$	52,937			$	66,868			$	1,886			$	481,834

 

F-59

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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Additionally, management’s policy is generally to evaluate only those substandard loans greater than $250 thousand for impairment as these are considered to be individually significant in relation to the size of the loan portfolio. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The following tables present interest income recognized and the average recorded investment of impaired loans.

 

		Three Months Ended								Nine Months Ended
		September 30, 2015								September 30, 2015
		Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment
		(Dollars in thousands)								(Dollars in thousands)
Real estate
Residential		$	97			$	2,004			$	178			$	1,844
Commercial			8				165				18				182
Residential Construction			—				—				—				—
Other Construction, Land Development & Other Land			—				352				3				1,820
Commercial			—				24				—				12
Consumer			18				277				36				283
Total		$	123			$	2,822			$	235			$	4,141

 

		Three Months Ended								Nine Months Ended
		September 30, 2014								September 30, 2014
		Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment
		(Dollars in thousands)								(Dollars in thousands)
Real estate
Residential		$	120			$	2,019			$	218			$	1,826
Commercial			11				366				45				456
Residential Construction			—				90				9				188
Other Construction, Land Development & Other Land			265				6,056				550				4,130
Commercial			—				24				1				117
Consumer			2				149				2				75
Total		$	398			$	8,704			$	825			$	6,792

Cash payments received on nonaccrual, impaired loans are applied on a cash basis with all cash receipts applied first to principal and any payments received in excess of the unpaid principal balance being applied to interest. Cash payments received on active, impaired loans are applied to both interest and principal.

Troubled Debt Restructurings

Accounting Standards Codification (ASC) 310 defines a troubled debt restructuring as a restructuring of a debt where a creditor for economic or legal reasons related to a debtor’s financial difficulties grants a concession to

 

F-60

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the debtor that it would not otherwise render. The concession is granted by the creditor in an attempt to protect as much of its investment as possible. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. Troubled debt restructurings include modification of the terms of a debt, such as a reduction of the stated interest rate to a new rate that is lower than the current market rate for new debt with similar risk, a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, or a reduction of accrued interest owed.

Management reviews all modifications that occur during the year for identification as troubled debt restructurings. Management identified as troubled debt restructurings certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology (ASC 450). Upon identifying the reviewed loans as troubled debt restructurings, management also identified them as impaired under the guidance in ASC 310.

Modification Categories

The Company offers a variety of modifications to borrowers. The modification alternatives offered can generally be described in the following categories:

Rate Modification – A modification in which the interest rate is changed.

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification – Any other type of modification, including the use of multiple categories described above.

As of September 30, 2015, and December 31, 2014, there were no available commitments outstanding for troubled debt restructurings.

The following tables present troubled debt restructurings as of the dates indicated:

 

		September 30, 2015
		Total Number of Contracts				Accrual Status				Nonaccrual Status				Total Modifications
		(Dollars in thousands)
Real estate
Residential			1			$	260			$	—			$	260
Commercial			—				—				—				—
Residential Construction			—				—				—				—
Other Construction, Land Development & Other Land			—				—				—				—
Commercial			—				—				—				—
Consumer			—				—				—				—
Total			1			$	260			$	—			$	260

 

F-61

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		December 31, 2014
		Total Number of Contracts				Accrual Status				Nonaccrual Status				Total Modifications
		(Dollars in thousands)
Real estate
Residential			1			$	266			$	—			$	266
Commercial			—				—				—				—
Residential Construction			—				—				—				—
Other Construction, Land Development & Other Land			4				4,819				1,052				5,871
Commercial			—				—				—				—
Consumer			—				—				—				—
Total			5			$	5,085			$	1,052			$	6,137

Loans reviewed for consideration of modification are reviewed for potential impairment at the time of the restructuring. Any identified impairment is recognized as a reduction in the allowance.

There were no newly restructured loans that occurred during the three or nine months ended September 30, 2015. The following table presents troubled debt restructurings that occurred during the three and nine months ended September 30, 2014:

 

		Three Months Ended September 30, 2014
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total
		(Dollars in thousands)
Real estate
Residential			1			$	—			$	—			$	—			$	—			$	550			$	550
Commercial			—				—				—				—				—				—				—
Residential Construction			—				—				—				—				—				—				—
Other Construction, Land			—				—				—				—				—				—				—
Residential Construction			—				—				—				—				—				—				—
Commercial			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			1			$	—			$	—			$	—			$	—			$	550			$	550

 

		Nine Months Ended September 30, 2014
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total
		(Dollars in thousands)
Real estate
Residential			2			$	—			$	—			$	—			$	—			$	818			$	818
Commercial			—				—				—				—				—				—				—
Residential Construction			—				—				—				—				—				—				—
Other Construction, Land
Development & Other Land			1				—				—				—				—				3,873				3,873
Commercial			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			3			$	—			$	—			$	—			$	—			$	4,691			$	4,691

 

F-62

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There were no financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three or nine month periods ended September 30, 2015, or 2014.

Note 7 – Other Real Estate Owned (OREO)

Changes in OREO were as follows for the periods indicated:

 

		Nine Months Ended September 30,
		2015				2014
		(Dollars in thousands)
Beginning Balance		$	1,810			$	2,658
Additions			100				256
Sales			(1,261	)			(952	)
Write-downs			(154	)			—
Ending Balance		$	495			$	1,962

Note 8 – Fair Value

The fair value of an asset or liability is the price that would be received upon a sale of that asset or paid to transfer that liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

Financial Accounting Standards Board (FASB) Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

Level 1 Inputs – 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 Inputs – 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; or other inputs that are observable or can be corroborated by observable market data.

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

Investment Securities: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). The Company obtains a single quote for all securities. Quotes for all of the securities are provided by the securities accounting and safekeeping correspondent bank, which performs a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluates any substantial changes.

 

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The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated. See Note 5 for a detailed listing of the fair values of available-for-sale securities.

 

		September 30, 2015
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Dollars in thousands)
Assets:
Available-for-sale securities		$	—			$	78,032			$	—			$	78,032

 

		December 31, 2014
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Dollars in thousands)
Assets:
Available-for-sale securities		$	—			$	74,283			$	—			$	74,283

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

Impaired Loans: The fair values of impaired loans are measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value measurement is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, fair values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses in the consolidated statements of operations.

Level 3 fair value measurements of impaired loans generally include discounts for unobservable input such as estimated selling costs, lack of marketability or practical life, and age of appraisal. Such discounts ranged from 0% to 30% for each of the respective periods presented.

Other Real Estate Owned: OREO assets are adjusted to fair value upon transfer of the loan collateral to the Company through or instead of foreclosure. Subsequently, OREO assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the OREO asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the OREO asset as nonrecurring Level 3.

Level 3 fair value measurements of OREO assets generally include discounts for unobservable input such as estimated selling costs, lack of marketability, and age of appraisal. Such discounts ranged from 0% to 30% for each of the respective periods presented.

 

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The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis during the periods noted.

 

		September 30, 2015
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Dollars in thousands)
Impaired loans		$	—			$	—			$	2,765			$	2,765
Other real estate owned			—				—				495				495
Total		$	—			$	—			$	3,260			$	3,260
		December 31, 2014
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Dollars in thousands)
Impaired loans		$	—			$	—			$	8,515			$	8,515
Other real estate owned			—				—				1,810				1,810
Total		$	—			$	—			$	10,325			$	10,325

The methods and assumptions, not previously presented, used by the Company in estimating fair values are as follows:

In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Cash and cash equivalents – The carrying amounts of cash and cash equivalents approximate fair value.

Time Deposits in Other Banks – The fair values of time deposits are estimated based on bid quotations received from independent pricing services for similar assets.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

Accrued interest – The carrying amounts of accrued interest receivable and payable approximate fair value.

 

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FHLB Advances – The carrying value of advances from the FHLB due within 90 days from the balance sheet date approximate fair value. Fair values for convertible advances are estimated using a discounted cash flow calculation that applies interest rates currently being offered on convertible advances with similar remaining maturities.

Repurchase agreements – The carrying value of repurchase agreements, which are secured transactions with customers that generally mature the day following the date sold, approximate fair value.

Subordinated Debt and Trust Preferred – The Company’s subordinated debt consists of variable rate instruments that reprice on a periodic basis, therefore, carrying value is adjusted for the repricing lag in order to approximate fair value.

Bank Owned Life Insurance (BOLI) – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

The estimated fair values of the Company’s financial instruments, which are all Level 2 in fair values hierarchy, as of September 30, 2015, and December 31, 2014, are as follows:

 

		September 30, 2015								December 31, 2014
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Dollars in thousands)								(Dollars in thousands)
Financial assets
Cash and cash equivalents		$	19,467			$	19,467			$	11,093			$	11,093
Time deposits in other banks			2,250				2,016				2,000				1,989
Investment securities			80,400				80,637				76,654				76,921
Loans, net			487,431				489,574				473,789				472,105
Accrued interest			1,849				1,849				1,736				1,736
BOLI			10,138				10,138				9,900				9,900
Financial liabilities
Deposits		$	520,528			$	519,425			$	479,507			$	477,359
FHLB advances			35,000				36,021				45,000				46,068
Subordinated debt and trust preferred			9,987				10,085				11,559				11,554
Repurchase agreements			—				—				1,761				1,761
Accrued interest			40				40				37				37

Note 9 – Recently Issued Accounting Pronouncements

In January 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an “in substance” repossession for foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required in such event. The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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In May of 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ( Topic 606). The guidance in this ASU superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of Codification. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This amendment is intended to clarify that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June of 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition, the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. For public business entities, the accounting changes and disclosure for certain transactions accounted for as a sale are effective for the first period (interim or annual) beginning after December 15, 2014. The disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June of 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require that a performance target that affects vesting and which could be achieved after the requisite service period be treated as a performance condition. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

Note 10 – Preferred Stock

The Company’s Preferred Stock has a $4.00 par value and a $1,000 liquidation preference. With 2,000,000 preferred shares authorized, there were no shares outstanding at September 30, 2015, or December 31, 2014.

Note 11 – Common Stock

In June 2014, the Board of Directors approved a change to the par value of the Company’s Common Stock from $4.00 per share to $.01 per share. With 30,000,000 shares of Common Stock authorized, at September 30, 2015, and at December 31, 2014, there were 12,923,392 and 12,864,542 shares outstanding, respectively.

In December 2014, the Board of Directors authorized a share repurchase program to purchase up to 300,000 shares of its outstanding common stock. During the nine months ended September 30, 2015, the Company repurchased 41,700 shares of its common stock.

 

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On May 20, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on June 25, 2015, to stockholders of record on June 10, 2015. On August 19, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on September 28, 2015, to stockholders of record on September 14, 2015.

Note 12 – Commitments

Park Sterling Merger: On September 30, 2015, the Company and Park Sterling Corporation (Park Sterling) entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which the Company will be acquired by Park Sterling (the Park Sterling Merger).

Under the terms of the Merger Agreement, the Company’s shareholders will have the right to receive either $5.54 in cash or 0.7748 of a Park Sterling common share for each share of the Company’s common stock they hold, subject to the limitation that the total consideration for the Company’s shareholders will consist of 30% in cash and 70% in Park Sterling shares. In addition, the Company’s warrant holders will have the right to receive either $1.77 in cash or 0.24755 of a Park Sterling common share for each warrant they hold, subject to the limitation that the total consideration payable to the Company’s warrant holders will consist of 30% in cash and 70% in Park Sterling shares.

The Park Sterling Merger is expected to close in the first quarter of 2016, subject to customary conditions, including approval by the Company’s shareholders and receipt of regulatory approval.

Construction and Sales Contracts: In October 2015, the Company entered into a contract with a builder for construction of a building on land owned by the Company. Construction is scheduled to begin in November 2015. In September 2015, the Company entered into a sales contract with a different party for the sale of such building, when complete, with the closing anticipated to occur during the second quarter of 2016.

Note 13 – Subsequent Event

On October 28, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on December 21, 2015, to stockholders of record on November 30, 2015.

 

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