NOTE A — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements required the use of certain estimates by management in determining the Company’s assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

 

Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, fair value of other real estate owned, and the valuation of deferred tax assets. Actual results could differ from those estimates.

NOTE B — RECENTLY ISSUED ACCOUNTING STANDARDS, Not adopted as of June 30, 2014

 

Accounting Standards Update No. 2014-01- Accounting for Investments in Qualified Affordable Housing Projects – In January 2014, FASB issued ASU 2014-01. This update provides guidance to investors in affordable housing projects that qualify for the low-income housing credit. The ASU will allow investors, in certain cases, to qualify for the use of the effective yield method of accounting in lieu of the equity method or the cost method. The new standard deems that investors should disclose information which allows users of its financial statements to understand this type of investment and the risks involved, including the related tax credits.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and is currently analyzing the effects the ASU will have on its financial position and results of operations.

 

Accounting Standards Update No. 2014-04- Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure – In January 2014, FASB issued ASU 2014-04. This amendment is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, and when a creditor should be considered to have received physical possession of residential real estate property. The Update also defines when the accounting change for the loan should take place.

  

The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

Accounting Standards Update No. 2014-09- Revenue from Contracts with Customers (Topic 606). In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents 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 ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently assessing the impact of adoption of ASU 2014-09.

 

Accounting Standards Update No. 2014-11- Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB issued ASU No. 2014-11. This ASU requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU will result in additional disclosures, but is not expected to impact significantly the Company’s consolidated financial position or results of operations.

 

Accounting Standards Update 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. In June 2014, the FASB issued ASU No. 2014-12. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. This ASU is effective for interim and annual reporting periods beginning after December 15, 2015 with earlier adoption permitted. The adoption of this ASU is not expected to impact significantly the Company’s consolidated financial position or results of operations.

NOTE C — BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE

 

Equivalent shares of 502,000 and 88,000 related to stock options, and stock settled appreciation rights for each of the periods ended June 30, 2014 and 2013, respectively, were excluded from the computation of diluted EPS because they would have been anti-dilutive.

  

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(Dollars in thousands, except per share data)		2014			2013			2014			2013
Basic:
Net income available to common shareholders		$	1,918		$	2,017		$	4,217		$	3,124
Average basic shares outstanding			25,826,825			18,794,651			25,659,159			18,792,054
Basic earnings per share		$	0.07		$	0.11		$	0.16		$	0.17
Diluted:
Net income available to common shareholders		$	1,918		$	2,017		$	4,217		$	3,124
Average basic shares outstanding			25,826,825			18,794,651			25,659,159			18,792,054
Employee restricted stock			171,296			141,829			169,232			138,825
Average diluted shares outstanding			25,998,121			18,936,480			25,828,391			18,930,879
Diluted earnings per share		$	0.07		$	0.11		$	0.16		$	0.17

NOTE D — SECURITIES

 

The amortized cost and fair value of securities available for sale and held for investment at June 30, 2014 and December 31, 2013 are summarized as follows:

  

		June 30, 2014
		Gross			Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
(Dollars in thousands)		Cost			Gains			Losses			Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities		$	100		$	0		$	0		$	100
Mortgage-backed securities of U.S. Government Sponsored Entities			104,837			2,192			(512)			106,517
Collateralized mortgage obligations of U.S. Government Sponsored Entities			272,160			785			(6,586)			266,359
Private mortgage backed securities			29,876			276			0			30,152
Private collateralized mortgage obligations			75,907			1,021			(236)			76,692
Collateralized loan obligations			32,658			0			(398)			32,260
Obligations of state and political subdivisions			5,767			506			0			6,273
		$	521,305		$	4,780		$	(7,732)		$	518,353
SECURITIES HELD FOR INVESTMENT
Collateralized mortgage obligations of U.S. Government Sponsored Entities		$	109,734		$	46		$	(778)		$	109,002
Mortgage-backed securities of U.S. Government Sponsored Entities			46,764			169			0			46,933
		$	156,498		$	215		$	(778)		$	155,935

  

		December 31, 2013
		Gross			Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
(Dollars in thousands)		Cost			Gains			Losses			Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S. Government Sponsored Entities		$	100		$	0		$	0		$	100
Mortgage-backed securities of U.S. Government Sponsored Entities			129,468			1,456			(4,189)			126,735
Collateralized mortgage obligations of U.S. Government Sponsored Entities			383,392			776			(14,747)			369,421
Private mortgage backed securities			29,800			0			(226)			29,574
Private collateralized mortgage obligations			76,520			731			(413)			76,838
Collateralized loan obligations			32,592			0			(413)			32,179
Obligations of state and political subdivisions			6,586			193			(15)			6,764
		$	658,458		$	3,156		$	(20,003)		$	641,611

 

Proceeds from sales of securities during the six month period ended June 30, 2014 were $4,061,000 with gross gains of $17,000 and no gross losses. Proceeds from sales of securities during the six month period ended June 30, 2013 were $55,519,000 with gross gains of $496,000 and gross losses of $357,000.

On May 31, 2014 management identified $158.8 million of investment securities available for sale and transferred them to held for investment. The unrealized holding losses at the date of transfer totaled $3.0 million.

 

The securities that were transferred into the held for investment category from the available for sale category, the unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of a discount. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount.

 

Securities with a carrying value of $97,858,000 and $97,740,000, respectively,  at June 30, 2014 were pledged as collateral for United States Treasury deposits, and other public and trust deposits. Securities with a carrying value of $179,415,000 and $179,056,000, respectively, were pledged as collateral for repurchase agreements.

 

The amortized cost and fair value of securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

  

		Held for Investment						Available for Sale
		Amortized			Fair			Amortized			Fair
(Dollars in thousands)		Cost			Value			Cost			Value
Due in less than one year		$	0		$	0		$	0		$	0
Due after one year through five years			0			0			541			550
Due after five years through ten years			0			0			8,054			7,945
Due after ten years			0			0			29,930			30,138
			0			0			38,525			38,633
Mortgage-backed securities of U.S. Government Sponsored Entities			46,764			46,933			104,837			106,517
Collateralized mortgage obligations of U.S. Government Sponsored Entities			109,734			109,002			272,160			266,359
Private mortgage backed securities			0			0			29,876			30,152
Private collateralized mortgage obligations			0			0			75,907			76,692
No contractual maturity			0			0			0			0
		$	156,498		$	155,935		$	521,305		$	518,353

 

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at June 30, 2014 and December 31, 2013, respectively.

  

		June 30, 2014
		Less than 12 months						12 months or longer						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
(Dollars in thousands)		Value			Losses			Value			Losses			Value			Losses
Mortgage-backed securities of U.S. Government Sponsored Entities		$	0		$	0		$	29,537		$	(512)		$	29,537		$	(512)
Collateralized mortgage obligations of U.S. Government Sponsored Entities			126,407			(778)			165,892			(6,586)			292,299			(7,364)
Private collaterlized mortgage obligations			7,043			(105)			11,626			(131)			18,669			(236)
Collateralized loan obligations			22,598			(229)			9,663			(169)			32,261			(398)
Total temporarily impaired securities		$	156,048		$	(1,112)		$	216,718		$	(7,398)		$	372,766		$	(8,510)

 

		December 31, 2013
		Less than 12 months						12 months or longer						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
(Dollars in thousands)		Value			Losses			Value			Losses			Value			Losses
Mortgage-backed securities of U.S. Government Sponsored Entities		$	33,425		$	(2,045)		$	35,043		$	(2,144)		$	68,468		$	(4,189)
Collateralized mortgage obligations of U.S. Government Sponsored Entities			287,312			(12,450)			45,657			(2,297)			332,969			(14,747)
Private mortage backed securities			29,573			(226)			0			0			29,573			(226)
Private collateralized mortgage obligations			47,653			(413)			0			0			47,653			(413)
Collateralized loan obligations			32,179			(413)			0			0			32,179			(413)
Obligations of state and political subdivisions			502			(14)			0			(1)			502			(15)
Total temporarily impaired securities		$	430,644		$	(15,561)		$	80,700		$	(4,442)		$	511,344		$	(20,003)

 

At June 30, 2014, approximately $0.2 million of the unrealized losses pertain to private label securities secured by collateral originated in 2005 and prior. Their fair value is $18.7 million and is attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for these investment securities in general. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgage loans with low loan to values, subordination and historically have had minimal foreclosures and losses. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

  

At June 30, 2014, the Company also had $7.8 million of unrealized losses on collateralized mortgage obligations and mortgage backed securities of government sponsored entities having a fair value of $321.8 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

At June 30, 2014, the Company also had $0.4 million of unrealized losses on collateralized loan obligations having a fair value of $32.3 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

As of June 30, 2014, management does not intend to sell securities that are in unrealized loss positions and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at June 30, 2014.

 

Included in other assets is $11.7 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At June 30, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $11.7 million of cost method investment securities.

NOTE E — LOANS

 

Information relating to loans is summarized as follows:

 

		June 30,			December 31,
(Dollars in thousands)		2014			2013
Construction and land development		$	57,393		$	67,450
Commercial real estate			538,217			520,382
Residential real estate			606,796			592,746
Commercial and financial			87,285			78,636
Consumer			45,241			44,713
Other loans			260			280
NET LOAN BALANCES		$	1,335,192		$	1,304,207

 

   

The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2014 and December 31, 2013:

 

June 30, 2014
								Accruing
		Accruing			Accruing			Greater									Total
		30-59 Days			60-89 Days			Than									Financing
(Dollars in thousands)		Past Due			Past Due			90 Days			Nonaccrual			Current			Receivables
Construction & land development		$	0		$	0		$	0		$	1,023		$	56,370		$	57,393
Commercial real estate			1,634			449			0			3,752			532,382			538,217
Residential real estate			420			82			0			16,507			589,787			606,796
Commercial and financial			66			0			0			10			87,209			87,285
Consumer			45			26			0			453			44,717			45,241
Other			0			0			0			0			260			260
Total		$	2,165		$	557		$	0		$	21,745		$	1,310,725		$	1,335,192

 

December 31, 2013
								Accruing
		Accruing			Accruing			Greater									Total
		30-59 Days			60-89 Days			Than									Financing
(Dollars in thousands)		Past Due			Past Due			90 Days			Nonaccrual			Current			Receivables
Construction & land development		$	3		$	0		$	0		$	1,302		$	66,145		$	67,450
Commercial real estate			684			345			0			5,111			514,242			520,382
Residential real estate			974			909			160			20,705			569,998			592,746
Commercial and financial			353			0			0			13			78,270			78,636
Consumer			33			27			0			541			44,112			44,713
Other			0			0			0			0			280			280
Total		$	2,047		$	1,281		$	160		$	27,672		$	1,273,047		$	1,304,207

 

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful” and these loans are monitored on an ongoing basis. Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as substandard may require a specific allowance, but generally does not exceed 30% of the principal balance. Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The principal balance of loans classified as doubtful are generally charged off. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.

  

Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager.  The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of June 30, 2014 and December 31, 2013:

 

June 30, 2014
		Construction									Commercial
		& Land			Commercial			Residential			and			Consumer
(Dollars in thousands)		Development			Real Estate			Real Estate			Financial			Loans			Total
Pass		$	53,595		$	507,606		$	574,638		$	87,048		$	43,849		$	1,266,736
Special mention			542			2,826			309			19			304			4,000
Substandard			0			12,575			1,399			58			522			14,554
Doubtful			0			0			0			0			0			0
Nonaccrual			1,023			3,752			16,507			10			453			21,745
Pass-Troubled debt restructures			1,710			5,480			24			0			0			7,214
Troubled debt restructures			523			5,978			13,919			150			373			20,943
		$	57,393		$	538,217		$	606,796		$	87,285		$	45,501		$	1,335,192

 

December 31, 2013
		Construction									Commercial
		& Land			Commercial			Residential			and			Consumer
(Dollars in thousands)		Development			Real Estate			Real Estate			Financial			Loans			Total
Pass		$	63,186		$	485,268		$	554,681		$	77,840		$	43,267		$	1,224,242
Special mention			583			6,810			824			382			300			8,899
Substandard			0			15,886			1,670			248			453			18,257
Doubtful			0			0			0			0			0			0
Nonaccrual			1,302			5,111			20,705			13			541			27,672
Pass-Troubled debt restructures			1,838			5,584			30			0			0			7,452
Troubled debt restructures			541			1,723			14,836			153			432			17,685
		$	67,450		$	520,382		$	592,746		$	78,636		$	44,993		$	1,304,207

NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

 

During the six months ending June 30, 2014 and 2013, newly identified troubled debt restructurings (“TDRs”) totaled $5.3 million and $5.7 million, respectively. Loans that are modified, but where full collection under the modified terms is doubtful are classified as nonaccrual loans from the date of modification.

 

The Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.

 

When a loan is modified as a TDR, there is not a direct, material impact on the loans within the Consolidated Balance Sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.

  

The following table presents loans that were modified within the six months ending June 30, 2014:

 

					Pre-			Post-
					Modification			Modification
		Number			Outstanding			Outstanding			Specific			Valuation
(Dollars in thousands)		of			Recorded			Recorded			Reserve			Allowance
Troubled Debt Restructurings Modified		Contracts			Investment			Investment			Recorded			Recorded
Residential real estate			3		$	601		$	564		$	0		$	37
Commercial real estate			1			4,300			3,975			0			325
			4		$	4,901		$	4,539		$	0		$	362

 

No accruing loans that were restructured within the twelve months preceding June 30, 2014 defaulted during the six months ended June 30, 2014. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned.  

  

As of June 30, 2014 and December 31, 2013, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:

 

		June 30, 2014
					Unpaid			Related
		Recorded			Principal			Valuation
(Dollars in thousands)		Investment			Balance			Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development		$	2,209		$	2,673		$	0
Commercial real estate			3,125			4,677			0
Residential real estate			10,023			14,051			0
Commercial and financial			150			150			0
Consumer			281			324			0
Impaired Loans with an Allowance Recorded:
Construction and land development			1,047			1,432			311
Commercial real estate			12,085			12,187			815
Residential real estate			20,427			21,450			3,440
Commercial and financial			10			10			10
Consumer			545			599			117
Total:
Construction and land development			3,256			4,105			311
Commercial real estate			15,210			16,864			815
Residential real estate			30,450			35,501			3,440
Commercial and financial			160			160			10
Consumer			826			923			117
		$	49,902		$	57,553		$	4,693

  

		December 31, 2013
					Unpaid			Related
		Recorded			Principal			Valuation
(Dollars in thousands)		Investment			Balance			Allowance
Impaired Loans with No Related Allowance Recorded:
Construction and land development		$	2,561		$	3,180		$	0
Commercial real estate			4,481			6,577			0
Residential real estate			12,366			17,372			0
Commercial and financial			153			153			0
Consumer			425			569			0
Impaired Loans with an Allowance Recorded:
Construction and land development			1,120			1,197			149
Commercial real estate			7,937			8,046			638
Residential real estate			23,365			24,766			4,528
Commercial and financial			13			13			13
Consumer			548			573			118
Total:
Construction and land development			3,681			4,377			149
Commercial real estate			12,418			14,623			638
Residential real estate			35,731			42,138			4,528
Commercial and financial			166			166			13
Consumer			973			1,142			118
		$	52,969		$	62,446		$	5,446

 

For the six months ended June 30, 2014 and 2013, the Company’s average recorded investments in impaired loans and related interest income were as follows:

 

		Six Months Ended						Six Months Ended
		June 30, 2014						June 30, 2013
		Average			Interest			Average			Interest
		Recorded			Income			Recorded			Income
(Dollars in thousands)		Investment			Recognized			Investment			Recognized
Impaired Loans with No Related Allowance
Recorded:
Construction & land development		$	2,196		$	51		$	2,216		$	50
Commercial real estate			2,394			7			9,194			18
Residential real estate			12,333			7			15,084			10
Commercial and financial			76			5			0			0
Consumer			345			0			142			1
Impaired Loans with an Allowance Recorded:
Construction & land development			1,311			12			1,547			19
Commercial real estate			9,853			361			24,115			274
Residential real estate			22,215			251			23,418			286
Commercial and financial			88			0			0			0
Consumer			541			10			586			11
Total:
Construction & land development			3,507			63			3,763			69
Commercial real estate			12,247			368			33,309			292
Residential real estate			34,548			258			38,502			296
Commercial and financial			164			5			0			0
Consumer			886			10			728			12
		$	51,352		$	704		$	76,302		$	669