Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2016.
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO           .

Commission file number:  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1284688
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
628 Main Street
 
 
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
x
No
o
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.

Yes
x
No
o
 

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

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

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

At November 2, 2016, the Company had 8,615,473 shares of Common Stock outstanding, $1 par value.


AMERICAN NATIONAL BANKSHARES INC.
Index
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
American National Bankshares Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
 
 
 
Assets
(Unaudited)
September 30, 2016
 
(*) December 31, 2015
Cash and due from banks
$
37,679

 
$
19,352

Interest-bearing deposits in other banks
35,138

 
75,985

 
 
 
 
Securities available for sale, at fair value
351,439

 
340,349

Restricted stock, at cost
6,006

 
5,312

Loans held for sale
4,776

 
3,266

 
 
 
 
Loans, net of unearned income
1,083,201

 
1,005,525

Less allowance for loan losses
(12,757
)
 
(12,601
)
Net loans
1,070,444

 
992,924

 
 
 
 
Premises and equipment, net
22,846

 
23,567

Other real estate owned, net of valuation allowance $134 in 2016 and $329 in 2015
1,145

 
2,184

Goodwill
43,872

 
43,872

Core deposit intangibles, net
1,894

 
2,683

Bank owned life insurance
17,998

 
17,658

Accrued interest receivable and other assets
22,297

 
20,447

Total assets
$
1,615,534

 
$
1,547,599

 
 
 
 
Liabilities
 

 
 

Demand deposits -- noninterest bearing
$
339,797

 
$
322,442

Demand deposits -- interest bearing
196,696

 
227,030

Money market deposits
255,748

 
200,495

Savings deposits
119,476

 
115,383

Time deposits
394,291

 
397,310

Total deposits
1,306,008

 
1,262,660

 
 
 
 
Customer repurchase agreements
44,090

 
40,611

Other short-term borrowings
15,000

 
—

Long-term borrowings
9,974

 
9,958

Junior subordinated debt
27,698

 
27,622

Accrued interest payable and other liabilities
9,051

 
8,913

Total liabilities
1,411,821

 
1,349,764

 
 
 
 
Shareholders' equity
 

 
 

Preferred stock, $5 par, 2,000,000 shares authorized, none outstanding
—

 
—

Common stock, $1 par, 20,000,000 shares authorized, 8,610,741 shares outstanding at September 30, 2016 and 8,622,007 shares outstanding at December 31, 2015
8,573

 
8,605

Capital in excess of par value
74,839

 
75,375

Retained earnings
117,543

 
111,565

Accumulated other comprehensive income, net
2,758

 
2,290

Total shareholders' equity
203,713

 
197,835

Total liabilities and shareholders' equity
$
1,615,534

 
$
1,547,599

(*) -  Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.

3


American National Bankshares Inc.
Consolidated Statements of Income
(Dollars in thousands, except share and per share data) (Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Interest and Dividend Income:
 
 
 
 
 
 
 
Interest and fees on loans
$
12,032

 
$
11,474

 
$
35,789

 
$
35,011

Interest on federal funds sold
—

 
1

 
—

 
6

Interest and dividends on securities:
 

 
 

 
 
 
 
Taxable
1,112

 
1,052

 
3,346

 
3,021

Tax-exempt
767

 
899

 
2,407

 
2,799

Dividends
74

 
91

 
258

 
258

Other interest income
78

 
25

 
203

 
123

Total interest and dividend income
14,063

 
13,542

 
42,003

 
41,218

Interest Expense:
 

 
 

 
 

 
 

Interest on deposits
1,291

 
1,205

 
3,902

 
3,583

Interest on short-term borrowings
4

 
2

 
6

 
7

Interest on long-term borrowings
81

 
82

 
243

 
243

Interest on junior subordinated debt
223

 
192

 
644

 
564

Total interest expense
1,599

 
1,481

 
4,795

 
4,397

Net Interest Income
12,464

 
12,061

 
37,208

 
36,821

Provision for Loan Losses
100

 
—

 
200

 
700

Net Interest Income After Provision for Loan Losses
12,364

 
12,061

 
37,008

 
36,121

Noninterest Income:
 

 
 

 
 

 
 

Trust fees
938

 
1,006

 
2,829

 
2,963

Service charges on deposit accounts
514

 
521

 
1,520

 
1,543

Other fees and commissions
663

 
592

 
1,991

 
1,787

Mortgage banking income
512

 
376

 
1,169

 
987

Securities gains, net
73

 
6

 
661

 
553

Brokerage fees
209

 
255

 
636

 
681

Income from Small Business Investment Companies
—

 
99

 
238

 
427

Other
211

 
200

 
740

 
528

Total noninterest income
3,120

 
3,055

 
9,784

 
9,469

Noninterest Expense:
 

 
 

 
 

 
 

Salaries
4,626

 
4,179

 
12,872

 
12,634

Employee benefits
1,034

 
1,029

 
3,203

 
3,215

Occupancy and equipment
1,004

 
1,094

 
3,162

 
3,290

FDIC assessment
138

 
185

 
519

 
565

Bank franchise tax
257

 
220

 
769

 
675

Core deposit intangible amortization
213

 
300

 
789

 
901

Data processing
437

 
366

 
1,340

 
1,311

Software
301

 
290

 
872

 
850

Other real estate owned, net
105

 
(126
)
 
314

 
60

Merger related expense
—

 
87

 
—

 
1,948

Other
1,752

 
1,764

 
5,601

 
5,628

Total noninterest expense
9,867

 
9,388

 
29,441

 
31,077

Income Before Income Taxes
5,617

 
5,728

 
17,351

 
14,513

Income Taxes
1,654

 
1,691

 
5,172

 
4,081

Net Income
$
3,963

 
$
4,037

 
$
12,179

 
$
10,432

 
 
 
 
 
 
 
 
Net Income Per Common Share:
 

 
 

 
 

 
 

Basic
$
0.46

 
$
0.47

 
$
1.41

 
$
1.20

Diluted
$
0.46

 
$
0.47

 
$
1.41

 
$
1.20

Average Common Shares Outstanding:
 

 
 

 
 

 
 

Basic
8,608,323

 
8,668,618

 
8,610,100

 
8,698,394

Diluted
8,618,335

 
8,676,571

 
8,618,386

 
8,706,870

The accompanying notes are an integral part of the consolidated financial statements.

4


American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
 
Three Months Ended 
 September 30,
 
2016
 
2015
Net income
$
3,963

 
$
4,037

 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gains (losses) on securities available for sale
(1,424
)
 
1,365

Tax effect
499

 
(478
)
 
 
 
 
Reclassification adjustment for gains on sales of securities
(73
)
 
(6
)
Tax effect
25

 
3

 
 
 
 
Other comprehensive income (loss)
(973
)
 
884

 
 
 
 
Comprehensive income
$
2,990

 
$
4,921


American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Net income
$
12,179

 
$
10,432

 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gains (losses) on securities available for sale
1,381

 
(29
)
Tax effect
(483
)
 
10

 
 
 
 
Reclassification adjustment for gains on sales of securities
(661
)
 
(553
)
Tax effect
231

 
194

 
 
 
 
Other comprehensive income (loss)
468

 
(378
)
 
 
 
 
Comprehensive income
$
12,647

 
$
10,054

The accompanying notes are an integral part of the consolidated financial statements.

5



American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share data) (Unaudited)
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders'
Equity
Balance, December 31, 2014
$
7,872

 
$
57,650

 
$
104,594

 
$
3,664

 
$
173,780

 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
10,432

 
—

 
10,432

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
—

 
—

 
—

 
(378
)
 
(378
)
 
 
 
 
 
 
 
 
 
 
Issuance of common stock (825,586 shares)
826

 
19,657

 
—

 
—

 
20,483

 
 
 
 
 
 
 
 
 
 
Stock repurchased (121,636 shares)
(122
)
 
(2,686
)
 
—

 
—

 
(2,808
)
 
 
 
 
 
 
 
 
 
 
Stock options exercised (22,074 shares)
22

 
377

 
—

 
—

 
399

 
 
 
 
 
 
 
 
 
 
Equity based compensation (30,831 shares)
13

 
526

 
—

 
—

 
539

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.69 per share
—

 
—

 
(5,996
)
 
—

 
(5,996
)
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
$
8,611

 
$
75,524

 
$
109,030

 
$
3,286

 
$
196,451

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
$
8,605

 
$
75,375

 
$
111,565

 
$
2,290

 
$
197,835

 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
12,179

 
—

 
12,179

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
—

 
—

 
—

 
468

 
468

 
 
 
 
 
 
 
 
 
 
Stock repurchased (51,384 shares)
(51
)
 
(1,241
)
 
—

 
—

 
(1,292
)
 
 
 
 
 
 
 
 
 
 
Stock options exercised (4,134 shares)
4

 
97

 
—

 
—

 
101

 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock (5,510 shares)
5

 
(5
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Equity based compensation (35,984 shares)
10

 
613

 
—

 
—

 
623

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.72 per share
—

 
—

 
(6,201
)
 
—

 
(6,201
)
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2016
$
8,573

 
$
74,839

 
$
117,543

 
$
2,758

 
$
203,713

The accompanying notes are an integral part of the consolidated financial statements.

6

American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
12,179

 
$
10,432

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
200

 
700

Depreciation
1,409

 
1,357

Net accretion of acquisition accounting adjustments
(1,709
)
 
(2,503
)
Core deposit intangible amortization
789

 
901

Net amortization of securities
2,034

 
2,062

Net gains on sale or call of securities
(661
)
 
(553
)
Gain on sale of loans held for sale
(906
)
 
(771
)
Proceeds from sales of loans held for sale
53,266

 
42,691

Originations of loans held for sale
(53,870
)
 
(44,302
)
Net loss (gain) on other real estate owned
72

 
(199
)
Valuation allowance on other real estate owned
156

 
86

Net loss on sale of premises and equipment
9

 
5

Equity based compensation expense
623

 
539

Net change in bank owned life insurance
(340
)
 
(343
)
Deferred income tax (benefit) expense
(1,596
)
 
1,482

Net change in interest receivable
(458
)
 
491

Net change in other assets
(211
)
 
107

Net change in interest payable
(18
)
 
3

Net change in other liabilities
156

 
(606
)
Net cash provided by operating activities
11,124

 
11,579

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Proceeds from sales of securities available for sale
9,317

 
7,429

Proceeds from maturities, calls and paydowns of securities available for sale
116,254

 
70,759

Purchases of securities available for sale
(137,314
)
 
(75,069
)
Net change in restricted stock
(694
)
 
(354
)
Net increase in loans
(76,015
)
 
(24,073
)
Proceeds from sale of premises and equipment
1

 
42

Purchases of premises and equipment
(536
)
 
(1,203
)
Proceeds from sales of other real estate owned
908

 
1,993

Cash paid in bank acquisition
—

 
(5,935
)
Cash acquired in bank acquisition
—

 
18,173

Net cash used in investing activities
(88,079
)
 
(8,238
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net change in demand, money market, and savings deposits
46,367

 
31,727

Net change in time deposits
(3,019
)
 
(18,148
)
Net change in customer repurchase agreements
3,479

 
(9,901
)
Net change in other short-term borrowings
15,000

 
—

Common stock dividends paid
(6,201
)
 
(5,996
)
Repurchase of common stock
(1,292
)
 
(2,808
)
Proceeds from exercise of stock options
101

 
399

Net cash provided by (used in) financing activities
54,435

 
(4,727
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(22,520
)
 
(1,386
)
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
95,337

 
67,303

 
 
 
 
Cash and Cash Equivalents at End of Period
$
72,817

 
$
65,917

The accompanying notes are an integral part of the consolidated financial statements.

7


AMERICAN NATIONAL BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Accounting Policies
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank").  The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, other than temporary impairment, the valuation of deferred tax assets and liabilities, and the valuation of other real estate owned ("OREO").
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 9.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period.  Certain reclassifications have been made to prior period balances to conform to the current period presentation. These reclassifications did not have an impact on net income and were considered immaterial. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Pronouncements     
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." This update is intended to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things: (1) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (4) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606,

8


Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.
During March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (1) income tax consequences; (2) classification of awards as either equity or liabilities; and (3) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission ("SEC") filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
    During August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

9



Note 2 – Acquisition of MainStreet BankShares, Inc.
On January 1, 2015, the Company completed its acquisition of MainStreet BankShares, Inc. ("MainStreet"). The merger of MainStreet with and into the Company was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of August 24, 2014, between the Company and MainStreet, and a related Plan of Merger. Immediately after the merger, Franklin Community Bank, N.A., MainStreet's wholly owned bank subsidiary, merged with and into the Bank.  
Pursuant to the MainStreet merger agreement, the former holders of shares of MainStreet common stock received $3.46 in cash and 0.482 shares of the Company's common stock for each share of MainStreet common stock held immediately prior to the effective date of the merger, plus cash in lieu of fractional shares.  Each option to purchase shares of MainStreet common stock that was outstanding immediately prior to the effective date of the merger vested upon the merger and was converted into an option to purchase shares of the Company's common stock, adjusted based on a 0.643 exchange ratio. Each share of the Company's common stock outstanding immediately prior to the merger remained outstanding and was unaffected by the merger. The cash portion of the merger consideration was funded through a cash dividend of $6,000,000 from the Bank to the Company, and no borrowing was incurred by the Company or the Bank in connection with the merger. Replacement stock option awards representing 43,086 shares of the Company's common stock were granted in conjunction with the MainStreet acquisition. 
MainStreet was the holding company for Franklin Community Bank, N.A.  As of January 1, 2015, MainStreet had net loans of approximately $122,000,000, total assets of approximately $164,000,000, and total deposits of approximately $137,000,000. Franklin Community Bank, N.A. provided banking services to its customers from three banking offices located in Rocky Mount, Hardy, and Union Hall, Virginia, which are now branch offices of the Bank.
The net impact of the amortization and accretion of premiums and discounts associated with the Company's acquisition accounting adjustments related to the MainStreet acquisition had the following impact on the Consolidated Statements of Income during the nine months ended September 30, 2016 and 2015 (dollars in thousands):
 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
Acquired performing loans
$
203

 
$
317

Acquired impaired loans
445

 
827

CD valuation
—

 
216

Brokered CD valuation
—

 
2

Amortization of core deposit intangible
(185
)
 
(220
)
Net impact to income before taxes
$
463

 
$
1,142



10


Note 3 – Securities 
The amortized cost and fair value of investments in debt and equity securities at September 30, 2016 and December 31, 2015 were as follows (dollars in thousands):
 
September 30, 2016
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
96,840

 
$
225

 
$
87

 
$
96,978

Mortgage-backed and CMOs
79,631

 
1,376

 
20

 
80,987

State and municipal
157,922

 
4,924

 
26

 
162,820

Corporate
8,697

 
123

 
—

 
8,820

Equity securities
1,288

 
546

 
—

 
1,834

Total securities available for sale
$
344,378

 
$
7,194

 
$
133

 
$
351,439

 
December 31, 2015
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
81,601

 
$
170

 
$
319

 
$
81,452

Mortgage-backed and CMOs
70,520

 
799

 
389

 
70,930

State and municipal
170,268

 
5,659

 
36

 
175,891

Corporate
10,619

 
28

 
57

 
10,590

Equity securities
1,000

 
486

 
—

 
1,486

Total securities available for sale
$
334,008

 
$
7,142

 
$
801

 
$
340,349

Restricted Stock
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost.  The restricted securities are not subject to the investment security classification and are included as a separate line item on the Company's Consolidated Balance Sheet.  The FRB requires the Bank to maintain stock with a par value equal to 3.0% of its outstanding capital and an additional 3.0% is on call.  The FHLB requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2016 and December 31, 2015 was as follows (dollars in thousands):
 
September 30,
2016
 
December 31,
2015
FRB stock
$
3,553

 
$
3,535

FHLB stock
2,453

 
1,777

Total restricted stock
$
6,006

 
$
5,312

Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

11


Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
35,876

 
$
87

 
$
35,876

 
$
87

 
$
—

 
$
—

Mortgage-backed and CMOs
2,140

 
20

 
334

 
1

 
1,806

 
19

State and municipal
8,906

 
26

 
8,089

 
26

 
817

 
—

Total
$
46,922

 
$
133

 
$
44,299

 
$
114

 
$
2,623

 
$
19

Federal agencies and GSEs: The unrealized loss on the Company's investment in eight government sponsored entity ("GSE") securities was caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016.
Mortgage-backed securities and CMOs: The unrealized losses on the Company's investment in six GSE mortgage-backed securities and collateralized mortgage obligations ("CMOs") were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016.
State and municipal securities:  The unrealized losses on 13 state and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016.
Corporate securities:  The Company had zero investments with unrealized losses in corporate securities. In prior periods when unrealized losses were shown they were caused by interest rate increases. The contractual terms of those investments did not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company did not intend to sell the investments and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost basis, which may have been maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2016.
Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at September 30, 2016, and no impairment has been recognized.
The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2015 (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
57,711

 
$
319

 
$
57,711

 
$
319

 
$
—

 
$
—

Mortgage-backed and CMOs
37,368

 
389

 
35,424

 
346

 
1,944

 
43

State and municipal
13,540

 
36

 
12,716

 
34

 
824

 
2

Corporate
5,107

 
57

 
3,530

 
29

 
1,577

 
28

Total
$
113,726

 
$
801

 
$
109,381

 
$
728

 
$
4,345

 
$
73

Other-Than-Temporary-Impaired Securities 
As of September 30, 2016 and December 31, 2015, there were no securities classified as other-than-temporary impaired.

12


Note 4 – Loans
Loans, excluding loans held for sale, at September 30, 2016 and December 31, 2015, were comprised of the following (dollars in thousands):
 
September 30,
2016
 
December 31, 2015
Commercial
$
204,184

 
$
177,481

Commercial real estate:
 

 
 

Construction and land development
91,688

 
72,968

Commercial real estate
454,797

 
430,186

Residential real estate:
 

 
 

Residential
218,632

 
220,434

Home equity
108,617

 
98,449

Consumer
5,283

 
6,007

Total loans
$
1,083,201

 
$
1,005,525

Acquired Loans 
The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at September 30, 2016 and December 31, 2015 are as follows (dollars in thousands): 
 
September 30,
2016
 
December 31, 2015
Outstanding principal balance
$
112,205

 
$
145,380

Carrying amount
103,911

 
135,254

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies FASB Accounting Standards Codification ("ASC") 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):
 
September 30,
2016
 
December 31, 2015
Outstanding principal balance
$
35,697

 
$
40,951

Carrying amount
29,739

 
33,878

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, at September 30, 2016 and December 31, 2015 (dollars in thousands):
 
September 30, 2016
 
December 31, 2015
Balance at January 1
$
7,299

 
$
1,440

Additions from merger with MainStreet
—

 
7,140

Accretion
(1,079
)
 
(211
)
Other changes, net
201

 
(1,070
)
 
$
6,421

 
$
7,299


13


Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2016 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
13

 
$
—

 
$
—

 
$
67

 
$
80

 
$
204,104

 
$
204,184

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
15

 
—

 
—

 
66

 
81

 
91,607

 
91,688

Commercial real estate
129

 
114

 
—

 
905

 
1,148

 
453,649

 
454,797

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
517

 
73

 
—

 
2,073

 
2,663

 
215,969

 
218,632

Home equity
95

 
34

 
—

 
726

 
855

 
107,762

 
108,617

Consumer
2

 
18

 
—

 
9

 
29

 
5,254

 
5,283

Total
$
771

 
$
239

 
$
—

 
$
3,846

 
$
4,856

 
$
1,078,345

 
$
1,083,201

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2015 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
137

 
$
—

 
$
—

 
$
90

 
$
227

 
$
177,254

 
$
177,481

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
—

 
—

 
—

 
258

 
258

 
72,710

 
72,968

Commercial real estate
135

 
182

 
—

 
2,497

 
2,814

 
427,372

 
430,186

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
913

 
398

 
—

 
1,731

 
3,042

 
217,392

 
220,434

Home equity
140

 
12

 
—

 
620

 
772

 
97,677

 
98,449

Consumer
53

 
1

 
—

 
9

 
63

 
5,944

 
6,007

Total
$
1,378

 
$
593

 
$
—

 
$
5,205

 
$
7,176

 
$
998,349

 
$
1,005,525


14


Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2016 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
25

 
$
25

 
$
—

 
$
9

 
$
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
238

 
238

 
—

 
238

 
13

Commercial real estate
1,837

 
1,838

 
—

 
1,282

 
76

Residential:
 

 
 

 
 

 
 

 
 

Residential
395

 
405

 
—

 
198

 
20

Home equity
409

 
602

 
—

 
189

 
16

Consumer
10

 
10

 
—

 
11

 
1

 
$
2,914

 
$
3,118

 
$
—

 
$
1,927

 
$
127

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial *
67

 
67

 
—

 
93

 
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development*
65

 
66

 
—

 
324

 
10

Commercial real estate*
146

 
145

 
—

 
346

 
7

Residential
 

 
 

 
 

 
 

 
 

Residential
1,563

 
1,565

 
21

 
1,582

 
16

Home equity
316

 
317

 
1

 
335

 
2

Consumer*
9

 
9

 
—

 
13

 
—

 
$
2,166

 
$
2,169

 
$
22

 
$
2,693

 
$
36

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
92

 
$
92

 
$
—

 
$
102

 
$
2

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
303

 
304

 
—

 
562

 
23

Commercial real estate
1,983

 
1,983

 
—

 
1,628

 
83

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,958

 
1,970

 
21

 
1,780

 
36

Home equity
725

 
919

 
1

 
524

 
18

Consumer
19

 
19

 
—

 
24

 
1

 
$
5,080

 
$
5,287

 
$
22

 
$
4,620

 
$
163

*Allowance is reported as zero in the table due to presentation in thousands and rounding.

15


The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2015 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
4

 
$
4

 
$
—

 
$
47

 
$
—

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
205

 
205

 
—

 
220

 
—

Commercial real estate
1,202

 
1,206

 
—

 
1,504

 
1

Residential:
 

 
 

 
 

 
 

 
 

Residential
127

 
124

 
—

 
126

 
—

Home equity
173

 
173

 
—

 
305

 
—

Consumer
13

 
13

 
—

 
14

 
—

 
$
1,724

 
$
1,725

 
$
—

 
$
2,216

 
$
1

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial*
$
91

 
$
91

 
$
—

 
$
99

 
$
—

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
448

 
449

 
6

 
563

 
26

Commercial real estate
390

 
391

 
3

 
353

 
17

Residential:
 

 
 

 
 

 
 

 
 

Residential*
1,649

 
1,690

 
—

 
1,034

 
22

Home equity
397

 
396

 
25

 
327

 
—

Consumer
8

 
9

 
1

 
11

 
—

 
$
2,983

 
$
3,026

 
$
35

 
$
2,387

 
$
65

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
95

 
$
95

 
$
—

 
$
146

 
$
—

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
653

 
654

 
6

 
783

 
26

Commercial real estate
1,592

 
1,597

 
3

 
1,857

 
18

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,776

 
1,814

 
—

 
1,160

 
22

Home equity
570

 
569

 
25

 
632

 
—

Consumer
21

 
22

 
1

 
25

 
—

 
$
4,707

 
$
4,751

 
$
35

 
$
4,603

 
$
66

*Allowance is reported as zero in the table due to presentation in thousands and rounding.


16


The following tables show the detail of loans modified as troubled debt restructurings ("TDRs") during the three and nine months ended September 30, 2016 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended September 30, 2016
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
—

 
$
—

 
$
—

Commercial real estate
 
—

 
—

 
—

Construction and land development
 
—

 
—

 
—

Home Equity
 
—

 
—

 
—

Residential real estate
 
1

 
56

 
47

Consumer
 
—

 
—

 
—

Total
 
1

 
$
56

 
$
47

 
 
Loans Modified as a TDR for the
 
 
Nine Months Ended September 30, 2016
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
1

 
$
24

 
$
24

Commercial real estate
 
2

 
1,005

 
1,003

Construction and land development
 
—

 
—

 
—

Home Equity
 
—

 
—

 
—

Residential real estate
 
2

 
58

 
48

Consumer
 
—

 
—

 
—

Total
 
5

 
$
1,087

 
$
1,075

The following tables show the detail of loans modified as TDRs during the three and nine months ended September 30, 2015 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended September 30, 2015
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
2

 
$
52

 
$
31

Commercial real estate
 
—

 
—

 
—