UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedMarch 31, 20172018

or

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

For the transition period fromto

 

Commission File Number: 001-32590

 

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia20-2652949

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

  
9954 Mayland Drive, Suite 2100 
Richmond, Virginia23233
(Address of principal executive offices)(Zip Code)

(804) 934-9999

(Registrant’s telephone number, including area code)

 

n/a

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 þ  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

 

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

 

Large accelerated filero¨ Accelerated filerþ
Non-accelerated filero¨(Do not check if a smaller reporting company)Smaller reporting company  o¨
Emerging growth companyo   
Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

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

 

At March 31, 2017,2018, there were 21,970,77322,084,193 shares of the Company’s common stock outstanding.

 

 

 

 

COMMUNITY BANKERS TRUST CORPORATION

 

TABLE OF CONTENTS

FORM 10-Q

March 31, 20172018

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements3
Unaudited Consolidated Balance Sheets3
Unaudited Consolidated Statements of Income4
Unaudited Consolidated Statements of Comprehensive Income5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity6
Unaudited Consolidated Statements of Cash Flows7
Notes to Unaudited Consolidated Financial Statements8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations2827
Item 3. Quantitative and Qualitative Disclosures About Market Risk40
Item 4. Controls and Procedures4241
PART II — OTHER INFORMATION 
Item 1. Legal Proceedings4241
Item 1A. Risk Factors42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds42
Item 3. Defaults upon Senior Securities42
Item 4. Mine Safety Disclosures4342
Item 5. Other Information4342
Item 6. Exhibits4342
SIGNATURES4443


2

PART I — FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 20172018 AND DECEMBER 31, 20162017

(dollars in thousands)thousands, except per share data)

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 * 
ASSETS                
Cash and due from banks $11,720  $13,828  $12,013  $14,642 
Interest bearing bank deposits  12,002   7,244   9,141   7,316 
Federal funds sold  132   —   152   — 
Total cash and cash equivalents  23,854   21,072   21,306   21,958 
                
Securities available for sale, at fair value  213,713   216,121   202,165   204,834 
Securities held to maturity, at cost (fair value of $46,881 and $46,858, respectively)  46,500   46,608 
Securities held to maturity, at cost (fair value of $44,578 and $46,888, respectively)  44,534   46,146 
Equity securities, restricted, at cost  8,177   8,290   9,356   9,295 
Total securities  268,390   271,019   256,055   260,275 
        
Loans held for sale  —   — 
                
Loans  852,226   836,299   964,311   942,018 
Purchased credit impaired (PCI) loans  49,738   51,964   42,215   44,333 
Total loans  901,964   888,263   1,006,526   986,351 
Allowance for loan losses (loans of $9,513 and $9,493, respectively; PCI loans of $200 and $200, respectively)  (9,713)  (9,693)
Allowance for loan losses (loans of $8,968 and $8,969, respectively; PCI loans of $200 and $200, respectively)  (9,168)  (9,169)
Net loans  892,251   878,570   997,358   977,182 
                
Bank premises and equipment, net  28,588   28,357   29,761   30,198 
Bank premises and equipment held for sale  525   — 
Other real estate owned  3,569   4,427   3,166   2,791 
Bank owned life insurance  27,531   27,339   28,282   28,099 
Core deposit intangibles, net  421   898 
Other assets  18,117   18,134   16,779   15,687 
Total assets $1,262,721  $1,249,816  $1,353,232  $1,336,190 
                
LIABILITIES                
Deposits:                
Noninterest bearing $129,042  $128,887  $150,037  $153,028 
Interest bearing  923,630   908,407   946,283   942,736 
Total deposits  1,052,672   1,037,294   1,096,320   1,095,764 
                
Federal funds purchased  —   4,714   20,000   4,849 
Federal Home Loan Bank advances  81,692   81,887 
Long-term debt  —   1,670 
Federal Home Loan Bank borrowings  101,061   101,429 
Trust preferred capital notes  4,124   4,124   4,124   4,124 
Other liabilities  6,520   5,591   6,683   6,021 
Total liabilities  1,145,008   1,135,280   1,228,188   1,212,187 
                
SHAREHOLDERS’ EQUITY                
Common stock (200,000,000 shares authorized, $0.01 par value; 21,970,773 and 21,959,648 shares issued and outstanding, respectively)  220   220 
Common stock (200,000,000 shares authorized, $0.01 par value; 22,084,193 and 22,072,523 shares issued and outstanding, respectively)  221   221 
Additional paid in capital  146,852   146,667   147,935   147,671 
Retained deficit  (28,635)  (31,128)  (21,338)  (23,932)
Accumulated other comprehensive loss  (724)  (1,223)
Accumulated other comprehensive (loss) income  (1,774)  43 
Total shareholders’ equity  117,713   114,536   125,044   124,003 
Total liabilities and shareholders’ equity $1,262,721  $1,249,816  $1,353,232  $1,336,190 

* Derived from audited financial statements

 

See accompanying notes to unaudited consolidated financial statements

 

3

3

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 20162017

(dollars and shares in thousands, except per share data)

 

 Three months ended  Three months ended 
 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
Interest and dividend income                
Interest and fees on loans $9,597  $8,553  $10,876  $9,597 
Interest and fees on PCI loans  1,479   1,599   1,398   1,479 
Interest on deposits in other banks  26   21   40   26 
Interest and dividends on securities                
Taxable  1,249   1,271   1,186   1,249 
Nontaxable  597   594   579   597 
Total interest and dividend income  12,948   12,038   14,079   12,948 
Interest expense                
Interest on deposits  1,779   1,551   2,143   1,779 
Interest on other borrowed funds  302   374 
Interest on borrowed funds  469   302 
Total interest expense  2,081   1,925   2,612   2,081 
Net interest income  10,867   10,113   11,467   10,867 
Provision for loan losses  —   —   —   — 
Net interest income after provision for loan losses  10,867   10,113   11,467   10,867 
Noninterest income                
Service charges on deposit accounts  643   569 
Service charges and fees  581   525 
Gain on securities transactions, net  95   259   30   95 
Income on bank owned life insurance  234   188   232   234 
Mortgage loan income  33   173   111   33 
Other  148   132   128   148 
Total noninterest income  1,153   1,321   1,082   1,035 
Noninterest expense                
Salaries and employee benefits  4,682   4,611   5,898   4,682 
Occupancy expenses  732   641   812   732 
Equipment expenses  284   239   314   284 
FDIC assessment  201   251   206   201 
Data processing fees  488   415   486   488 
Amortization of intangibles  477   477   —   477 
Other real estate expense (income), net  27   (102)
Other real estate expense, net  50   27 
Other operating expenses  1,560   1,499   1,649   1,442 
Total noninterest expense  8,451   8,031   9,415   8,333 
Income before income taxes  3,569   3,403   3,134   3,569 
Income tax expense  1,076   983   540   1,076 
Net income $2,493  $2,420  $2,594  $2,493 
Net income per share — basic $0.11  $0.11  $0.12  $0.11 
Net income per share — diluted $0.11  $0.11  $0.12  $0.11 
Weighted average number of shares outstanding                
Basic  21,962   21,873   22,076   21,962 
Diluted  22,433   22,065   22,521   22,433 

 

See accompanying notes to unaudited consolidated financial statements


4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 20162017

(dollars in thousands)

 

 Three months ended  Three months ended 
 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
Net income $2,493  $2,420  $2,594  $2,493 
                
Other comprehensive income:        
Unrealized gain on investment securities:        
Change in unrealized gain in investment securities  770   3,553 
Tax related to unrealized gain in investment securities  (262)  (1,208)
Other comprehensive (loss) income:        
Unrealized (loss) gain on investment securities:        
Change in unrealized (loss) gain in investment securities  (2,488)  770 
Tax related to unrealized loss (gain) in investment securities  548   (262)
Reclassification adjustment for gain in securities sold  (95)  (259)  (30)  (95)
Tax related to realized gain in securities sold  32   88   7   32 
Cash flow hedge:                
Change in unrealized gain (loss) in cash flow hedge  82   (548)
Change in unrealized gain in cash flow hedge  186   82 
Tax related to cash flow hedge  (28)  186   (40)  (28)
Total other comprehensive income  499   1,812 
Total other comprehensive (loss) income  (1,817)  499 
Total comprehensive income $2,992  $4,232  $777  $2,992 

 

See accompanying notes to unaudited consolidated financial statements


5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 20162017

(dollars and shares in thousands)

 

          Accumulated              Accumulated    
      Additional     Other          Additional     Other    
 Common Stock  Paid in  Retained  Comprehensive     Common Stock  Paid in  Retained  Comprehensive    
 Shares  Amount  Capital  Deficit  Income (Loss)  Total  Shares  Amount  Capital  Deficit  (Loss) Income  Total 
                          
Balance January 1, 2016  21,867  $219  $145,907  $(41,050) $(589) $104,487 
Issuance of common stock  20   —   44   —   —   44 
Exercise and issuance of employee stock options  —   —   124   —   —   124 
Net income  —   —   —   2,420   —   2,420 
Other comprehensive income  —   —   —   —   1,812   1,812 
Balance March 31, 2016  21,887  $219  $146,075  $(38,630) $1,223  $108,887 
Balance January 1, 2017  21,960  $220  $146,667  $(31,128) $(1,223) $114,536   21,960  $220  $146,667  $(31,128) $(1,223) $114,536 
Issuance of common stock  11   —   39   —   —   39   11   —   39   —   —   39 
Exercise and issuance of employee stock options  —   —   146   —   —   146   —   —   146   —   —   146 
Net income  —   —   —   2,493   —   2,493   —   —   —   2,493   —   2,493 
Other comprehensive income  —   —   —   —   499   499   —   —   —   —   499   499 
Balance March 31, 2017  21,971  $220  $146,852  $(28,635) $(724) $117,713   21,971  $220  $146,852  $(28,635) $(724) $117,713 
Balance January 1, 2018  22,073  $221  $147,671  $(23,932) $43  $124,003 
Issuance of common stock  4   —   39   —   —   39 
Exercise and issuance of employee stock options  7   —   225   —   —   225 
Net income  —   —   —   2,594   —   2,594 
Other comprehensive loss  —   —   —   —   (1,817)  (1,817)
Balance March 31, 2018  22,084  $221  $147,935  $(21,338) $(1,774) $125,044 

 

See accompanying notes to unaudited consolidated financial statements


6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 20162017

(dollars in thousands)

 

 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
Operating activities:                
Net income $2,493  $2,420  $2,594  $2,493 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and intangibles amortization  877   844   459   877 
Stock-based compensation expense  185   143   234   185 
Tax benefit of exercised stock options  (10)  — 
Amortization of purchased loan premium  45   63   54   45 
Amortization of security premiums and accretion of discounts, net  359   409   443   359 
Net gain on sale of securities  (95)  (259)  (30)  (95)
Net gain on sale and valuation of OREO and bank premises  (14)  (154)
Net gain on sale and valuation of other real estate owned  —   (14)
Originations of mortgages held for sale  —   (10,618)  (872)  — 
Proceeds from sales of mortgages held for sale  —   11,681   872   — 
Increase in bank owned life insurance investment  (192)  (153)  (184)  (192)
Changes in assets and liabilities:                
(Increase) decrease in other assets  (226)  393 
Increase (decrease) in other liabilities  1,000   (1,088)
Increase in other assets  (182)  (226)
Increase in accrued expenses and other liabilities  673   1,000 
Net cash provided by operating activities  4,432   3,681   4,051   4,432 
                
Investing activities:                
Proceeds from available for sale securities  23,816   53,331 
Proceeds from held to maturity securities  89   677 
Proceeds from equity securities  813   935 
Proceeds from sales/calls/maturities/paydowns of available for sale securities  9,363   23,816 
Proceeds from calls/maturities/paydowns of held to maturity securities  1,584   89 
Proceeds from sales of restricted equity securities  17   813 
Purchase of available for sale securities  (20,981)  (13,508)  (9,596)  (20,981)
Purchase of held to maturity securities  —   (8,510)
Purchase of equity securities  (700)  (909)
Purchase of restricted equity securities  (78)  (700)
Proceeds from sale of other real estate owned  872   543   21   872 
Improvements of other real estate, net of insurance proceeds  —   (24)
Net increase in loans  (13,832)  (14,703)  (20,708)  (13,832)
Principal recoveries of loans previously charged off  105   173   83   105 
Purchase of premises and equipment, net  (631)  (214)  (548)  (631)
Proceeds from sale of premises and equipment  —   145 
Net cash (used in) provided by investing activities  (10,449)  17,936 
Purchase of small business investment company fund investment  (210)  — 
Net cash used in investing activities  (20,072)  (10,449)
                
Financing activities:                
Net increase (decrease) in deposits  15,378   (11,467)
Net decrease in federal funds purchased  (4,714)  (7,904)
Net decrease in Federal Home Loan Bank advances  (195)  (4,190)
Net increase in deposits  556   15,378 
Net increase (decrease) in federal funds purchased  15,151   (4,714)
Net increase in short-term Federal Home Loan Bank borrowings  5,000   — 
Payments on long-term Federal Home Loan Bank borrowings  (5,368)  (195)
Proceeds from issuance of common stock  —   15   30   — 
Payments on long-term debt  (1,670)  (801)  —   (1,670)
Net cash provided by (used in) financing activities  8,799   (24,347)
Net cash provided by financing activities  15,369   8,799 
                
Net increase (decrease) in cash and cash equivalents  2,782   (2,730)
Net (decrease) increase in cash and cash equivalents  (652)  2,782 
                
Cash and cash equivalents:                
Beginning of the period  21,072   16,969   21,958   21,072 
End of the period $23,854  $14,239  $21,306  $23,854 
                
Supplemental disclosures of cash flow information:                
Interest paid $2,141  $1,901  $2,638  $2,141 
Income taxes paid  —   2,400 
Transfers of loans to other real estate owned  396   — 
Transfers of building premises and equipment to held for sale  525   — 

 

See accompanying notes to unaudited consolidated financial statements

 

7

7

 

 

COMMUNITY BANKERS TRUST CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Nature of Banking Activities and Significant Accounting Policies

 

Organization

 

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2326 full-service offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

 

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

 

Financial Statements

 

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of March 31, 2017,2018, the statements of income and comprehensive income for the three months ended March 31, 2018, and the statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2017.2018. Results for the three month period ended March 31, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.

 

The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

 

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

Certain reclassifications have been made to prior period balances to conform to the current year presentations.

Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.

Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basis that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. Further, there is diversity in practice (1) in the amortization period for premiums of callable debt securities, and (2) in how the potential for exercise of a call is factored into current impairment assessments.


The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company is currently in compliance with this guidance; therefore, its adoption will have Such reclassifications had no impact on its financial statements.net income or shareholder’s equity.

 

Also in March 2017, the FASB issued ASU No. 2017-07,Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.The amendments apply to all employers, including not-for-profit entities, that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715,Compensation — Retirement Benefits.

8

 

The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. The line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company does not expect the adoption of this guidance to have a material impact on its financial statements. The Company does not offer a post retirement benefit plan. As the Company’s pension plan is frozen, no additional service cost will be incurred. The remaining components of net periodic benefit cost are not expected to be significant. See Note 10 for further details.

 

Note 2. Securities

 

Amortized costs and fair values of securities available for sale and held to maturity at March 31, 20172018 and December 31, 20162017 were as follows(dollars in thousands):

 

  March 31, 2017 
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $49,637  $18  $(701) $48,954 
U.S. Gov’t  sponsored agencies  2,921   —   (59)  2,862 
State, county and municipal  125,731   2,398   (1,042)  127,087 
Corporate and other bonds  16,246   54   (239)  16,061 
Mortgage backed – U.S. Gov’t agencies  3,606   —   (130)  3,476 
Mortgage backed – U.S. Gov’t sponsored agencies  15,519   25   (271)  15,273 
Total Securities Available for Sale $213,660  $2,495  $(2,442) $213,713 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $—  $(124) $9,876 
State, county and municipal  35,831   668   (178)  36,321 
Mortgage backed – U.S. Gov’t agencies  669   15   —   684 
Total Securities Held to Maturity $46,500  $683  $(302) $46,881 

 December 31, 2016  March 31, 2018 
    Gross Unrealized        Gross Unrealized    
 Amortized Cost  Gains  Losses  Fair Value  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                                
U.S. Treasury issue and other U.S. Gov’t agencies $58,724  $15  $(763) $57,976  $37,978  $149  $(526) $37,601 
U.S. Gov’t sponsored agencies  3,452   —   (116)  3,336   9,168   81   (22)  9,227 
State, county and municipal  121,686   2,247   (1,160)  122,773   123,949   1,079   (1,454)  123,574 
Corporate and other bonds  15,936   —   (433)  15,503   7,702   164   (52)  7,814 
Mortgage backed – U.S. Gov’t agencies  3,614   —   (119)  3,495   5,456   20   (204)  5,272 
Mortgage backed – U.S. Gov’t sponsored agencies  13,330   21   (313)  13,038   19,207   26   (556)  18,677 
Total Securities Available for Sale $216,742  $2,283  $(2,904) $216,121  $203,460  $1,519  $(2,814) $202,165 
                                
Securities Held to Maturity                                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $—  $(154) $9,846  $10,000  $—  $(255) $9,745 
State, county and municipal  35,847   568   (185)  36,230   34,111   415   (121)  34,405 
Mortgage backed – U.S. Gov’t agencies  761   21   —   482   423   5   —   428 
Total Securities Held to Maturity $46,608  $589  $(339) $46,858  $44,534  $420  $(376) $44,578 

  December 31, 2017 
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $40,473  $165  $(382) $40,256 
U.S. Gov’t sponsored agencies  9,247   55   (24)  9,278 
State, county and municipal  124,032   2,324   (596)  125,760 
Corporate and other bonds  7,323   173   (36)  7,460 
Mortgage backed – U.S. Gov’t agencies  5,551   37   (146)  5,442 
Mortgage backed – U.S. Gov’t sponsored agencies  16,985   26   (373)  16,638 
Total Securities Available for Sale $203,611  $2,780  $(1,557) $204,834 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $—  $(155) $9,845 
State, county and municipal  35,678   922   (33)  36,567 
Mortgage backed – U.S. Gov’t agencies  468   8   —   476 
Total Securities Held to Maturity $46,146  $930  $(188) $46,888 

 

The amortized cost and fair value of securities at March 31, 20172018 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

 

 Held to Maturity  Available for Sale  Held to Maturity  Available for Sale 
(dollars in thousands) Amortized Cost  Fair Value  Amortized Cost  Fair Value  Amortized Cost  Fair Value  Amortized Cost  Fair Value 
Due in one year or less $13,104  $12,998  $1,837  $1,862  $13,662  $13,426  $5,321  $5,292 
Due after one year through five years  11,481   11,641   91,477   92,637   13,737   13,808   89,246   89,466 
Due after five years through ten years  13,667   13,907   100,870   100,024   12,529   12,692   101,615   100,099 
Due after ten years  8,248   8,335   19,476   19,190   4,606   4,652   7,278   7,308 
Total securities $46,500  $46,881  $213,660  $213,713  $44,534  $44,578  $203,460  $202,165 

9

 

Proceeds from sales of securities available for sale were $22.3$7.0 million and $51.4$22.3 million during the three months ended March 31, 20172018 and 2016,2017, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the three months ended March 31, 20172018 and 20162017 were as follows (dollars in thousands):

 

 Three Months Ended  Three months ended 
 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
Gross realized gains $130  $754  $42  $130 
Gross realized losses  (35)  (495)  (12)  (35)
Net securities gains $95  $259  $30  $95 

 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three months ended March 31, 20172018 and 2016.2017.

 


The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at March 31, 20172018 and December 31, 20162017 were as follows (dollars in thousands):

 

 March 31, 2018 
 March 31, 2017  Less than 12 Months  12 Months or More  Total 
 Less than 12 Months  12 Months or More  Total  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
Securities Available for Sale Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss                         
U.S. Treasury issue and other U.S. Gov’t agencies $17,873  $(290) $25,400  $(411) $43,273  $(701) $7,555  $(70) $16,619  $(456) $24,174  $(526)
U.S. Gov’t sponsored agencies  -   -   2,362   (59)  2,362   (59)  -   -   2,969   (22)  2,969   (22)
State, county and municipal  33,054   (729)  3,483   (313)  36,537   (1,042)  42,017   (815)  10,481   (639)  52,498   (1,454)
Corporate and other bonds  2,995   (75)  7,363   (164)  10,358   (239)  481   (16)  2,681   (36)  3,162   (52)
Mortgage backed – U.S. Gov’t agencies  1,586   (22)  1,890   (108)  3,476   (130)  1,670   (42)  1,836   (162)  3,506   (204)
Mortgage backed – U.S. Gov’t sponsored agencies  10,157   (270)  132   (1)  10,289   (271)  7,865   (238)  7,790   (318)  15,655   (556)
Total $65,665  $(1,386) $40,630  $(1,056) $106,295  $(2,442) $59,588  $(1,181) $42,376  $(1,633) $101,964  $(2,814)
                                                
Securities Held to Maturity                                                
U.S. Treasury issue and other U.S. Gov’t agencies $9,876  $(124) $-  $-  $9,876  $(124) $-  $-  $9,745  $(255) $9,745  $(255)
State, county and municipal  7,494   (178)  -   -   7,494   (178)  6,118   (89)  1,245   (32)  7,363   (121)
Total $17,370  $(302) $-  $-  $17,370  $(302) $6,118  $(89) $10,990  $(287) $17,108  $(376)
                                                
 December 31, 2016  December 31, 2017 
 Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total 
 Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
Securities Available for Sale Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss                         
U.S. Treasury issue and other U.S. Gov’t agencies $29,756  $(324) $25,155  $(439) $54,911  $(763) $5,097  $(36) $19,443  $(346) $24,540  $(382)
U.S. Gov’t sponsored agencies  -   -   2,523   (116)  2,523   (116)  497   (3)  5,040   (21)  5,537   (24)
State, county and municipal  39,713   (848)  3,885   (312)  43,598   (1,160)  20,740   (188)  9,569   (408)  30,309   (596)
Corporate and other bonds  6,864   (103)  8,639   (330)  15,503   (433)  -   -   2,772   (36)  2,772   (36)
Mortgage backed – U.S. Gov’t agencies  1,598   (18)  1,897   (101)  3,495   (119)  1,722   (25)  1,876   (121)  3,598   (146)
Mortgage backed – U.S. Gov’t sponsored agencies  9,247   (313)  -   -   9,247   (313)  6,525   (111)  7,985   (262)  14,510   (373)
Total $87,178  $(1,606) $42,099  $(1,298) $129,277  $(2,904) $34,581  $(363) $46,685  $(1,194) $81,266  $(1,557)
                                                
Securities Held to Maturity                                                
U.S. Treasury issue and other U.S. Gov’t agencies $9,846  $(154) $-  $-  $9,846  $(154) $-  $-  $9,845  $(155) $9,845  $(155)
State, county and municipal  8,052   (185)  -   -   8,052   (185)  1,485   (14)  1,262   (19)  2,747   (33)
Total $17,898  $(339) $-  $-  $17,898  $(339) $1,485  $(14) $11,107  $(174) $12,592  $(188)

10

 

The unrealized losses (impairments) in the investment portfolio at March 31, 20172018 and December 31, 20162017 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 147176 securities at March 31, 2017.2018. Of those, 131169 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. SixteenFive investment grade asset-backed securities comprised of student loan pools included in corporate obligations and other bond obligations comprisetwo corporate bonds make up the remaining securities with unrealized losses at March 31, 2017.2018. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

 

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

 

Securities with amortized costs of $72.3$68.6 million and $75.8$71.7 million at March 31, 20172018 and December 31, 2016,2017, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $4.2$7.0 million and $4.4$7.0 million at March 31, 20172018 and December 31, 2016,2017, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of March 31, 20172018 and December 31, 2016,2017, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.


Note 3. Loans and Related Allowance for Loan Losses

 

The Company’s loans, net of deferred fees and costs, at March 31, 20172018 and December 31, 20162017 were comprised of the following (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Amount  % of Loans  Amount  % of Loans  Amount  % of Loans  Amount  % of Loans 
Mortgage loans on real estate:                                
Residential 1-4 family $210,517   24.71% $207,863   24.86% $222,717   23.10% $227,542   24.16%
Commercial  343,604   40.32   339,804   40.63   371,494   38.52   366,331   38.89 
Construction and land development  96,152   11.28   98,282   11.75   109,534   11.36   107,814   11.44 
Second mortgages  7,724   0.91   7,911   0.95   7,689   0.80   8,410   0.89 
Multifamily  49,469   5.80   39,084   4.67   59,920   6.21   59,024   6.27 
Agriculture  7,449   0.87   7,185   0.86   7,424   0.77   7,483   0.79 
Total real estate loans  714,915   83.89   700,129   83.72   778,778   80.76   776,604   82.44 
Commercial loans  130,729   15.34   129,300   15.46   170,445   17.67   159,024   16.88 
Consumer installment loans  5,321   0.62   5,627   0.67   13,878   1.44   5,169   0.55 
All other loans  1,261   0.15   1,243   0.15   1,210   0.13   1,221   0.13 
Total loans $852,226   100.00% $836,299   100.00% $964,311   100.00% $942,018   100.00%

 

The Company held $15.7$17.7 million and $15.8$18.0 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at March 31, 20172018 and December 31, 2016,2017, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $718,000$785,000 and $749,000$824,000 at March 31, 20172018 and December 31, 2016,2017, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method.

 

At March 31, 20172018 and December 31, 2016,2017, the Company’s allowance for credit losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASCFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310,Receivables,(ii) a general valuation component calculated in accordance with FASB Accounting Standards Codification (ASC)ASC 450,Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.


11

The following table summarizes information related to impaired loans as of March 31, 20172018 (dollars in thousands):

 

        Three months ended 
        Three months ended  March 31, 2018  March 31, 2018 
 March 31, 2017  March 31, 2017  Recorded
Investment(1)		  Unpaid
Principal
Balance(2)		  Related
Allowance		  Average
Investment		  Interest
Recognized		 
With no related allowance recorded: Recorded
Investment(1)		  Unpaid
Principal
Balance(2)		  Related
Allowance		  Average
Investment		  Interest
Recognized		                     
Mortgage loans on real estate:                                        
Residential 1-4 family $2,189  $2,479  $—  $1,947  $7  $1,873  $2,235  $—  $1,888  $7 
Commercial  4,156   4,726   —   5,363   38   3,825   4,467   —   3,844   37 
Construction and land development  —   —   —   —   —   417   417   —   208   — 
Agriculture  —   —   —   —   — 
Total real estate loans  6,345   7,205   —   7,310   45   6,115   7,119   —   5,940   44 
Commercial loans  —   —   —   600   —   978   978   —   1,043   — 
Consumer installment loans  —   —   —   —   — 
Subtotal impaired loans with no valuation allowance  6,345   7,205   —   7,910   45   7,093   8,097   —   6,983   44 
With an allowance recorded:                                        
Mortgage loans on real estate:                                        
Residential 1-4 family  2,335   2,737   321   2,478   12   2,253   2,688   296   2,234   19 
Commercial  396   786   50   506   2   518   955   64   525   2 
Construction and land development  4,304   5,558   538   4,900   —   5,137   6,401   694   4,707   — 
Agriculture  67   71   8   68   — 
Total real estate loans  7,035   9,081   909   7,884   14   7,975   10,115   1,062   7,534   21 
Commercial loans  284   284   36   168   1   250   251   31   287   1 
Consumer installment loans  42   46   5   162   —   4   4   —   5   — 
Subtotal impaired loans with a valuation allowance  7,361   9,411   950   8,214   15   8,229   10,370   1,093   7,826   22 
Total:                                        
Mortgage loans on real estate:                                        
Residential 1-4 family  4,524   5,216   321   4,425   19   4,126   4,923   296   4,122   26 
Commercial  4,552   5,512   50   5,869   40   4,343   5,422   64   4,369   39 
Construction and land development  4,304   5,558   538   4,900   —   5,554   6,818   694   4,915   — 
Agriculture  67   71   8   68   — 
Total real estate loans  13,380   16,286   909   15,194   59   14,090   17,234   1,062   13,474   65 
Commercial loans  284   284   36   768   1   1,228   1,229   31   1,330   1 
Consumer installment loans  42   46   5   162   —   4   4   —   5   — 
Total impaired loans $13,706  $16,616  $950  $16,124  $60  $15,322  $18,467  $1,093  $14,809  $66 

 

(1)The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment

(2)The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances


12

The following table summarizes information related to impaired loans as of December 31, 20162017 and the three months ended March 31, 20162017 (dollars in thousands):

 

        Three months ended 
        Three months ended  December 31, 2017  March 31, 2017 
 December 31, 2016  March 31, 2016  Recorded
Investment(1)		  Unpaid
Principal
Balance(2)		  Related
Allowance		  Average
Investment		  Interest
Recognized		 
With no related allowance recorded: Recorded
Investment(1)		  Unpaid
Principal
Balance(2)		  Related
Allowance		  Average
Investment		  Interest
Recognized		                     
Mortgage loans on real estate:                                        
Residential 1-4 family $1,704  $1,931  $—  $2,455  $11  $1,901  $2,246  $—  $1,947  $7 
Commercial  6,570   7,078   —   4,297   39   3,862   4,477   —   5,363   38 
Construction and land development  —   —   —   —   —   —   —   —   —   — 
Second mortgages  —   —   —   —   — 
Agriculture  —   —   —   —   — 
Total real estate loans  8,274   9,009   —   6,752   50   5,763   6,723   —   7,310   45 
Commercial loans  1,200   1,200   —   —   —   1,108   1,108   —   600   — 
Consumer installment loans  —   —   —   124   1   —   —   —   —   — 
Subtotal impaired loans with no valuation allowance  9,474   10,209   —   6,876   51   6,871   7,831   —   7,910   45 
With an allowance recorded:                                        
Mortgage loans on real estate:                                        
Residential 1-4 family  2,621   3,062   283   3,400   7   2,216   2,640   290   2,478   12 
Commercial  617   1,051   73   481   2   533   958   65   506   2 
Construction and land development  5,495   6,746   730   4,502   —   4,277   5,537   556   4,900   — 
Second mortgages  —   —   —   80   — 
Agriculture  68   71   8   —   — 
Total real estate loans  8,733   10,859   1,086   8,463   9   7,094   9,206   919   7,884   14 
Commercial loans  53   53   7   27   —   325   446   39   168   1 
Consumer installment loans  281   285   37   79   —   7   7   1   162   — 
Subtotal impaired loans with a valuation allowance  9,067   11,197   1,130   8,569   9   7,426   9,659   959   8,214   15 
Total:                                        
Mortgage loans on real estate:                                        
Residential 1-4 family  4,325   4,993   283   5,855   18   4,117   4,886   290   4,425   19 
Commercial  7,187   8,129   73   4,778   41   4,395   5,435   65   5,869   40 
Construction and land development  5,495   6,746   730   4,502   —   4,277   5,537   556   4,900   — 
Second mortgages  —   —   —   80   — 
Agriculture  68   71   8   —   — 
Total real estate loans  17,007   19,868   1,086   15,215   59   12,857   15,929   919   15,194   59 
Commercial loans  1,253   1,253   7   27   —   1,433   1,554   39   768   1 
Consumer installment loans  281   285   37   203   1   7   7   1   162   — 
Total impaired loans $18,541  $21,406  $1,130  $15,445  $60  $14,297  $17,490  $959  $16,124  $60 

 

(1)The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment

(2)The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances

 

Troubled debt restructures and some substandard loans still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at March 31, 20172018 and December 31, 2016,2017, is set forth in the table below (dollars in thousands):

 

  March 31, 2017  December 31, 2016 
Nonaccruals $9,091  $10,243 
Trouble debt restructure and still accruing  4,615   4,653 
Substandard and still accruing  —   3,645 
Total impaired $13,706  $18,541 

  March 31, 2018  December 31, 2017 
Nonaccruals $10,090  $9,026 
Trouble debt restructure and still accruing  5,232   5,271 
Total impaired $15,322  $14,297 

 

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three months ended March 31, 20172018 and 2016.2017. For the three months ended March 31, 20172018 and 2016,2017, estimated interest income of $163,000and $204,000,$160,000 and $163,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.


13

There were no loans greater than 90 days past due and still accruing interest at March 31, 2018 and December 31, 2017. The following tables present an age analysis of past due status of loans by category as of March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  March 31, 2018 
 30-89 Days
Past Due		  90+ Days Past
Due and
Accruing		  Nonaccrual  Total Past
Due		  Current  Total Loans
Receivable		  30-89 Days
Past Due		  Nonaccrual  Total Past
Due		  Current  Total Loans
Receivable		 
Mortgage loans on real estate:                                            
Residential 1-4 family $271  $—  $3,104  $3,375  $207,142  $210,517  $1,075  $1,985  $3,060  $219,657  $222,717 
Commercial  —   —   1,588   1,588   342,016   343,604   1,611   1,466   3,077   368,417   371,494 
Construction and land development  —   —   4,304   4,304   91,848   96,152   62   5,554   5,616   103,918   109,534 
Second mortgages  —   —   —   —   7,724   7,724   —   —   —   7,689   7,689 
Multifamily  —   —   —   —   49,469   49,469   —   —   —   59,920   59,920 
Agriculture  —   112   —   112   7,337   7,449   19   67   86   7,338   7,424 
Total real estate loans  271   112   8,996   9,379   705,536   714,915   2,767   9,072   11,839   766,939   778,778 
Commercial loans  334   —   53   387   130,342   130,729   98   1,014   1,112   169,333   170,445 
Consumer installment loans  27   —   42   69   5,252   5,321   9   4   13   13,865   13,878 
All other loans  —   —   —   —   1,261   1,261   —   —   —   1,210   1,210 
Total loans $632  $112  $9,091  $9,835  $842,391  $852,226  $2,874  $10,090  $12,964  $951,347  $964,311 
                        
 December 31, 2016 
 30-89 Days
Past Due		  90+ Days Past
Due and
Accruing		  Nonaccrual  Total Past
Due		  Current  Total Loans
Receivable		 
Mortgage loans on real estate:                        
Residential 1-4 family $296  $—  $2,893  $3,189  $204,674  $207,863 
Commercial  —   —   1,758   1,758   338,046   339,804 
Construction and land development  54   —   5,495   5,549   92,733   98,282 
Second mortgages  —   —   —   —   7,911   7,911 
Multifamily  —   —   —   —   39,084   39,084 
Agriculture  —   —   —   —   7,185   7,185 
Total real estate loans  350   —   10,146   10,496   689,633   700,129 
Commercial loans  —   —   53   53   129,247   129,300 
Consumer installment loans  3   —   44   47   5,580   5,627 
All other loans  —   —   —   —   1,243   1,243 
Total loans $353  $—  $10,243  $10,596  $825,703  $836,299 

 


  December 31, 2017 
  30-89 Days
Past Due		  Nonaccrual  Total Past
Due		  Current  Total Loans
Receivable		 
Mortgage loans on real estate:                    
Residential 1-4 family $1,056  $1,962  $3,018  $224,524  $227,542 
Commercial  104   1,498   1,602   364,729   366,331 
Construction and land development  —   4,277   4,277   103,537   107,814 
Second mortgages  —   —   —   8,410   8,410 
Multifamily  —   —   —   59,024   59,024 
Agriculture  19   68   87   7,396   7,483 
Total real estate loans  1,179   7,805   8,984   767,620   776,604 
Commercial loans  48   1,214   1,262   157,762   159,024 
Consumer installment loans  12   7   19   5,150   5,169 
All other loans  —   —   —   1,221   1,221 
Total loans $1,239  $9,026  $10,265  $931,753  $942,018 

Activity in the allowance for loan losses excluding PCI loans, on loans by segment for the three months ended March 31, 20172018 and 20162017 is presented in the following tables (dollars in thousands):

 

 December 31, 2016  Provision
Allocation		  Charge-offs  Recoveries  March 31, 2017  December 31, 2017  Provision
Allocation		  Charge-offs  Recoveries  March 31, 2018 
Mortgage loans on real estate:                                        
Residential 1-4 family $2,769  $62  $(26) $18  $2,823  $3,466  $(366) $—  $15  $3,115 
Commercial  1,952   (183)  —   7   1,776   2,423   184   —   13   2,620 
Construction and land development  2,195   (635)  (14)  1   1,547   1,247   364   —   1   1,612 
Second mortgages  72   (69)  —   47   50   24   9   —   1   34 
Multifamily  260   (67)  —   —   193   496   (298)  —   —   198 
Agriculture  15   17   —   —   32   14   19   —   —   33 
Total real estate loans  7,263   (875)  (40)  73   6,421��  7,670   (88)  —   30   7,612 
Commercial loans  602   712   —   2   1,316   1,139   (152)  (39)  14   962 
Consumer installment loans  135   13   (45)  30   133   110   8   (45)  39   112 
All other loans  7   8   —   —   15   3   7   —   —   10 
Unallocated  1,486   142   —   —   1,628   47   225   —   —   272 
Total loans $9,493  $—  $(85) $105  $9,513  $8,969  $—  $(84) $83  $8,968 
                    
 December 31, 2015  Provision
Allocation		  Charge-offs  Recoveries  March 31, 2016 
Mortgage loans on real estate:                    
Residential 1-4 family $2,884  $(508) $(19) $98  $2,455 
Commercial  3,769   (630)  (37)  12   3,114 
Construction and land development  1,298   290   —   1   1,589 
Second mortgages  96   3   —   4   103 
Multifamily  141   159   —   —   300 
Agriculture  24   (12)  —   —   12 
Total real estate loans  8,212   (698)  (56)  115   7,573 
Commercial loans  631   317   —   —   948 
Consumer installment loans  93   17   (82)  58   86 
All other loans  25   (19)  —   —   6 
Unallocated  598   383   —   —   981 
Total loans $9,559  $—  $(138) $173  $9,594 

14

  December 31, 2016  Provision
Allocation		  Charge-offs  Recoveries  March 31, 2017 
Mortgage loans on real estate:                    
Residential 1-4 family $2,769  $62  $(26) $18  $2,823 
Commercial  1,952   (183)  —   7   1,776 
Construction and land development  2,195   (635)  (14)  1   1,547 
Second mortgages  72   (69)  —   47   50 
Multifamily  260   (67)  —   —   193 
Agriculture  15   17   —   —   32 
Total real estate loans  7,263   (875)  (40)  73   6,421 
Commercial loans  602   712   —   2   1,316 
Consumer installment loans  135   13   (45)  30   133 
All other loans  7   8   —   —   15 
Unallocated  1,486   142   —   —   1,628 
Total loans $9,493  $—  $(85) $105  $9,513 

 

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

  March 31, 2018 
  Allowance for Loan Losses  Recorded Investment in Loans 
  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total 
Mortgage loans on real estate:                        
Residential 1-4 family $296  $2,819  $3,115  $4,126  $218,591  $222,717 
Commercial  64   2,556   2,620   4,343   367,151   371,494 
Construction and land development  694   918   1,612   5,554   103,980   109,534 
Second mortgages  —   34   34   —   7,689   7,689 
Multifamily  —   198   198   —   59,920   59,920 
Agriculture  8   25   33   67   7,357   7,424 
Total real estate loans  1,062   6,550   7,612   14,090   764,688   778,778 
Commercial loans  31   931   962   1,228   169,217   170,445 
Consumer installment loans  —   112   112   4   13,874   13,878 
All other loans  —   10   10   —   1,210   1,210 
Unallocated  —   272   272   —   —   — 
Total loans $1,093  $7,875  $8,968  $15,322  $948,989  $964,311 

  March 31, 2017 
  Allowance for Loan Losses  Recorded Investment in Loans 
  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total 
Mortgage loans on real estate:                        
Residential 1-4 family $321  $2,502  $2,823  $4,524  $205,993  $210,517 
Commercial  50   1,726   1,776   4,552   339,052   343,604 
Construction and land development  538   1,009   1,547   4,304   91,848   96,152 
Second mortgages  —   50   50   —   7,724   7,724 
Multifamily  —   193   193   —   49,469   49,469 
Agriculture  —   32   32   —   7,449   7,449 
Total real estate loans  909   5,512   6,421   13,380   701,535   714,915 
Commercial loans  36   1,280   1,316   284   130,445   130,729 
Consumer installment loans  5   128   133   42   5,279   5,321 
All other loans  —   15   15   —   1,261   1,261 
Unallocated  —   1,628   1,628   —   —   — 
Total loans $950  $8,563  $9,513  $13,706  $838,520  $852,226 

15

 December 31, 2016  December 31, 2017 
 Allowance for Loan Losses  Recorded Investment in Loans  Allowance for Loan Losses  Recorded Investment in Loans 
  Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total   Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total  Individually
Evaluated for
Impairment		  Collectively
Evaluated for
Impairment		  Total 
Mortgage loans on real estate:                                                
Residential 1-4 family $283  $2,486  $2,769  $4,325  $203,538  $207,863  $290  $3,176  $3,466  $4,117  $223,425  $227,542 
Commercial  73   1,879   1,952   7,187   332,617   339,804   65   2,358   2,423   4,396   361,935   366,331 
Construction and land development  730   1,465   2,195   5,495   92,787   98,282   556   691   1,247   4,276   103,538   107,814 
Second mortgages  —   72   72   —   7,911   7,911   —   24   24   —   8,410   8,410 
Multifamily  —   260   260   —   39,084   39,084   —   496   496   —   59,024   59,024 
Agriculture  —   15   15   —   7,185   7,185   8   6   14   68   7,415   7,483 
Total real estate loans  1,086   6,177   7,263   17,007   683,122   700,129   919   6,751   7,670   12,857   763,747   776,604 
Commercial loans  7   595   602   1,253   128,047   129,300   39   1,100   1,139   1,433   157,591   159,024 
Consumer installment loans  37   98   135   281   5,346   5,627   1   109   110   7   5,162   5,169 
All other loans  —   7   7   —   1,243   1,243   —   3   3   —   1,221   1,221 
Unallocated  —   1,486   1,486   —   —   —   —   47   47   —   —   — 
Total loans $1,130  $8,363  $9,493  $18,541  $817,758  $836,299  $959  $8,010  $8,969  $14,297  $927,721  $942,018 

 

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

 

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $15.7$17.7 million and $15.8$18.0 million at March 31, 20172018 and December 31, 2016,2017, respectively.

 

Special Mention - A special mention loan 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 loans are not adversely classified and do not warrant adverse classification.

 

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

 

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.


16

The following tables present the composition of loans by credit quality indicator at March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  March 31, 2018 
 Pass  Special
Mention		  Substandard  Doubtful  Total  Pass  Special
Mention		  Substandard  Doubtful  Total 
Mortgage loans on real estate:                                        
Residential 1-4 family $203,046  $4,171  $3,300  $—  $210,517  $217,935  $2,753  $2,029  $—  $222,717 
Commercial  334,557   3,330   5,717   —   343,604   354,462   14,073   2,959   —   371,494 
Construction and land development  91,659   189   4,304   —   96,152   103,810   170   5,554   —   109,534 
Second mortgages  7,245   479   —   —   7,724   7,474   215   —   —   7,689 
Multifamily  46,883   —   2,586   —   49,469   57,357   —   2,563   —   59,920 
Agriculture  7,224   113   112   —   7,449   6,952   386   86   —   7,424 
Total real estate loans  690,614   8,282   16,019   —   714,915   747,990   17,597   13,191   —   778,778 
Commercial loans  123,179   5,111   2,439   —   130,729   167,659   1,738   1,048   —   170,445 
Consumer installment loans  5,256   23   42   —   5,321   13,683   191   4   —   13,878 
All other loans  1,261   —   —   —   1,261   1,210   —   —   —   1,210 
Total loans $820,310  $13,416  $18,500  $—  $852,226  $930,542  $19,526  $14,243  $—  $964,311 

 

 December 31, 2016  December 31, 2017 
 Pass  Special
Mention		  Substandard  Doubtful  Total  Pass  Special
Mention		  Substandard  Doubtful  Total 
Mortgage loans on real estate:                                        
Residential 1-4 family $199,973  $4,612  $3,278  $—  $207,863  $222,026  $3,442  $2,074  $—  $227,542 
Commercial  330,851   3,168   5,785   —   339,804   355,188   8,145   2,998   —   366,331 
Construction and land development  92,556   234   5,492   —   98,282   103,356   182   4,276   —   107,814 
Second mortgages  7,474   437   —   —   7,911   8,187   223   —   —   8,410 
Multifamily  36,474   —   2,610   —   39,084   56,452   —   2,572   —   59,024 
Agriculture  7,067   118   —   —   7,185   7,010   385   88   —   7,483 
Total real estate loans  674,395   8,569   17,165   —   700,129   752,219   12,377   12,008   —   776,604 
Commercial loans  122,129   5,879   1,292   —   129,300   156,604   1,171   1,249   —   159,024 
Consumer installment loans  5,563   20   44   —   5,627   5,137   25   7   —   5,169 
All other loans  1,243   —   —   —   1,243   1,221   —   —   —   1,221 
Total loans $803,330  $14,468  $18,501  $—  $836,299  $915,181  $13,573  $13,264  $—  $942,018 

 

In accordance with FASB ASUAccounting Standards Update (ASU) 2011-02,Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 23 and 17 loans that met the definition of a TDR at each of March 31, 20172018 and 2016,2017, respectively.

 

The Company had no loan modifications considered to be TDRs during the three months ended March 31, 2017. During the three months ended March 31, 2016, the Company modified one consumer installment loan that was considered to be a TDR. The Company extended the terms2018 and lowered the interest rate for this loan, which had a pre- and post-modification balance of $248,000.2017.

 

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three months ended March 31, 20172018 and 2016.2017.

 

In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35,Receivables, Subsequent Measurement.

 

At March 31, 2017,2018, the Company had 1-4 family mortgages in the amount of $149.4$137.1 million pledged to the Federal Home Loan Bank with a lendable collateral value of $135.0$110.3 million.


17

Note 4.  PCI Loans and Related Allowance for Loan Losses

 

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

 

As of March 31, 20172018 and December 31, 2016,2017, the outstanding contractual balance of the PCI loans was $78.3$68.2 million and $81.1$71.0 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Amount  % of PCI
Loans		  Amount  % of PCI
Loans		  Amount  % of PCI
Loans		  Amount  % of PCI
Loans		 
Mortgage loans on real estate:                                
Residential 1-4 family $44,465   89.40% $46,623   89.72% $37,980   89.97% $39,805   89.79%
Commercial  622   1.25   649   1.25   503   1.19   547   1.23 
Construction and land development  1,935   3.89   1,969   3.79   1,526   3.61   1,588   3.58 
Second mortgages  2,450   4.93   2,453   4.72   1,953   4.63   2,136   4.82 
Multifamily  266   0.53   270   0.52   253   0.60   257   0.58 
Total real estate loans  49,738   100.00   51,964   100.00   42,215   100.00   44,333   100.00 
Total PCI loans $49,738   100.00% $51,964   100.00% $42,215   100.00% $44,333   100.00%

 

There was no activity in the allowance for loan losses on PCI loans for the three months ended March 31, 20172018 and 2016.2017.

 

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Allowance
for loan
losses		  Recorded
investment in
loans		  Allowance
for loan
losses		  Recorded
investment in
loans		  Allowance for
loan losses		  Recorded
investment in
loans		  Allowance for
loan losses		  Recorded
investment in
loans		 
Mortgage loans on real estate:                                
Residential 1-4 family $200  $44,465  $200  $46,623  $200  $37,980  $200  $39,805 
Commercial  —   622   —   649   —   503   —   547 
Construction and land development  —   1,935   —   1,969   —   1,526   —   1,588 
Second mortgages  —   2,450   —   2,453   —   1,953   —   2,136 
Multifamily  —   266   —   270   —   253   —   257 
Total real estate loans  200   49,738   200   51,964   200   42,215   200   44,333 
Total PCI loans $200  $49,738  $200  $51,964  $200  $42,215  $200  $44,333 

The change in the accretable yield balance for the three months ended March 31, 20172018 and the year ended December 31, 2016,2017, is as follows (dollars in thousands):

 

Balance, January 1, 2016 $49,128 
Accretion  (6,206)
Reclassification from nonaccretable yield  5,433 
Balance, December 31, 2016 $48,355 
Accretion  (1,479)
Reclassification from nonaccretable yield  45 
Balance, March 31, 2017 $46,921 
Balance, January 1, 2017 $48,355 
Accretion  (5,729)
Reclassification from nonaccretable difference  1,500 
Balance, December 31, 2017 $44,126 
Accretion  (1,397)
Reclassification to nonaccretable difference  (113)
Balance, March 31, 2018 $42,616 

18

 

The PCI loans were not classified as nonperforming assets as of March 31, 2017,2018, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

 

Note 5.  Other Real Estate Owned

 

The following table presents the balances of other real estate owned at March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
          
Residential 1-4 family $454  $1,276  $882  $486 
Commercial  630   643   15   15 
Construction and land development  2,485   2,508   2,269   2,290 
Total other real estate owned $3,569  $4,427  $3,166  $2,791 

 

At March 31, 2017,2018, the Company had $1.7 million$417,000 in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

 

Note 6.  Deposits

 

The following table provides interest bearing deposit information, by type, as ofat March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
          
NOW $130,971  $137,332  $154,236  $157,037 
MMDA  103,042   111,346   148,404   143,363 
Savings  92,683   90,340   93,724   93,980 
Time deposits less than or equal to $250,000  452,075   440,699   435,481   437,810 
Time deposits over $250,000  144,859   128,690   114,438   110,546 
Total interest bearing deposits $923,630  $908,407  $946,283  $942,736 

 

Note 7. Accumulated Other Comprehensive (Loss) Income

 

The following tables present activity net of tax in accumulated other comprehensive (loss) income (AOCI) for the three months ended March 31, 20172018 and 20162017 (dollars in thousands):

 

 Three months ended March 31, 2017  Three months ended March 31, 2018 
 Unrealized
Gain (Loss)
on Securities		  Defined
Benefit
Pension Plan		  Gain (Loss) on
Cash Flow
Hedge		  Total Other
Comprehensive
(Loss) Income		  Unrealized
Gain (Loss)
on Securities		  Defined
Benefit
Pension Plan		  Gain (Loss) on
Cash Flow
Hedge		  Total Other
Comprehensive
(Loss) Income		 
                  
Beginning balance $(410) $(767) $(46) $(1,223) $954  $(1,048) $137  $43 
Other comprehensive income (loss) before reclassifications  508   -   54   562 
Other comprehensive (loss) income before reclassifications  (1,940)  -   146   (1,794)
Amounts reclassified from AOCI  (63)  -   -   (63)  (23)  -   -   (23)
Net current period other comprehensive income (loss)  445   -   54   499 
Net current period other comprehensive (loss) income  (1,963)  -   146   (1,817)
Ending balance $35  $(767)��$8  $(724) $(1,009) $(1,048) $283  $(1,774)
                
 Three months ended March 31, 2016 
 Unrealized
Gain (Loss)
on Securities		  Defined
Benefit
Pension Plan		  Gain (Loss) on
Cash Flow
Hedge		  Total Other
Comprehensive
(Loss) Income		 
         
Beginning balance $443  $(901) $(131) $(589)
Other comprehensive income (loss) before reclassifications  2,345   -   (362)  1,983 
Amounts reclassified from AOCI  (171)  -   -   (171)
Net current period other comprehensive income (loss)  2,174   -   (362)  1,812 
Ending balance $2,617  $(901) $(493) $1,223 

19

  Three months ended March 31, 2017 
  Unrealized
Gain (Loss)
on Securities		  Defined
Benefit
Pension Plan		  Gain (Loss) on
Cash Flow
Hedge		  Total Other
Comprehensive
(Loss) Income		 
             
Beginning balance $(410) $(767) $(46) $(1,223)
Other comprehensive (loss) income before reclassifications  508   -   54   562 
Amounts reclassified from AOCI  (63)  -   -   (63)
Net current period other comprehensive (loss) income  445   -   54   499 
Ending balance $35  $(767) $8  $(724)

 

The following table presents the effects of reclassifications out of AOCI on line items of consolidated income for the three months ended March 31, 20172018 and 20162017 (dollars in thousands):

 

Details about AOCI Components Amount Reclassified fromAOCI  Affected Line Item in the
Unaudited Consolidated
Statement of Income (Loss)		 Amount Reclassified from AOCI  Affected Line Item in
the Unaudited
Consolidated
Statement of Income
 Three months ended    Three months ended   
 March 31, 2017  March 31, 2016    March 31, 2018  March 31, 2017   
Securities available for sale          
Securities available for sale:          
Unrealized gains on securities available for sale $(95) $(259) 

Gain on securities transactions, net

 $(30) $(95) Gain on securities transactions, net
Related tax expense  32   88  Income tax expense  7   32  Income tax expense
 $(63) $(171) Net of tax $(23) $(63) Net of tax

 

Note 8. Fair Values of Assets and Liabilities

 

FASB ASC 820,Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:


• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

 

• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

• Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

 

20

FASB ASC 825,Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of March 31, 2017.2018.

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and loans held for sale are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

 

  March 31, 2017 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $48,954  $1,790  $47,164  $- 
U.S. Gov’t sponsored agencies  2,862   -   2,862   - 
State, county and municipal  127,087   3,328   123,759   - 
Corporate and other bonds  16,061   -   16,061   - 
Mortgage backed – U.S. Gov’t agencies  3,476   -   3,476   - 
Mortgage backed – U.S. Gov’t sponsored agencies  15,273   1,066   14,207   - 
Total investment securities available for sale  213,713   6,184   207,529   - 
Cash flow hedge $12  $-  $12  $- 
Total assets at fair value $213,725  $6,184  $207,541  $- 
Total liabilities at fair value $-  $-  $-  $- 
                 
  December 31, 2016 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $57,976  $11,055  $46,921  $- 
U.S. Gov’t sponsored agencies  3,336   952   2,384   - 
State, county and municipal  122,773   2,345   120,428   - 
Corporate and other bonds  15,503   -   15,503   - 
Mortgage backed – U.S. Gov’t agencies  3,495   -   3,495   - 
Mortgage backed – U.S. Gov’t sponsored agencies  13,038   -   13,038   - 
Total investment securities available for sale  216,121   14,352   201,769   - 
Total assets at fair value $216,121  $14,352  $201,769  $- 
Cash flow hedge $(70) $-  $(70) $- 
Total liabilities at fair value $(70) $-  $(70) $- 

22

  March 31, 2018 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $37,601  $-  $37,601  $- 
U.S. Gov’t sponsored agencies  9,227   -   9,227   - 
State, county and municipal  123,574   1,468   122,106   - 
Corporate and other bonds  7,814   -   7,814   - 
Mortgage backed – U.S. Gov’t agencies  5,272   -   5,272   - 
Mortgage backed – U.S. Gov’t sponsored agencies  18,677   1,046   17,631   - 
Total investment securities available for sale  202,165   2,514   199,651   - 
Cash flow hedge  363   -   363   - 
Total assets at fair value $202,528  $2,514  $200,014  $- 
Total liabilities at fair value $-  $-  $-  $- 

 

  December 31, 2017 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $40,256  $-  $40,256  $- 
U.S. Gov’t sponsored agencies  9,278   -   9,278   - 
State, county and municipal  125,760   332   125,428   - 
Corporate and other bonds  7,460   -   7,460   - 
Mortgage backed – U.S. Gov’t agencies  5,442   -   5,442   - 
Mortgage backed – U.S. Gov’t sponsored agencies  16,638   -   16,638   - 
Total investment securities available for sale  204,834   332   204,502   - 
Cash flow hedge  177   -   177   - 
Total assets at fair value $205,011  $332  $204,679  $- 
Total liabilities at fair value $-  $-  $-  $- 

 

Investment securities available for sale

 

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). Quoted prices are available within the same month as the settlement date of the related security transaction. As a result, investment securities held at December 31, 2017 priced as Level 1 that were still held at March 31, 2018 were priced as Level 2 securities. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

 

21

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing company for security market data. The third party vendor has controls and edits in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 16 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

 

Cash flow hedge

 

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of March 31, 20172018 and December 31, 20162017 (dollars in thousands):

 

 March 31, 2017  March 31, 2018 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Impaired loans $8,557  $—  $1,969  $6,588  $8,983  $—  $1,716  $7,267 
Bank premises and equipment held for sale  525   —   —   525 
Other real estate owned  3,569   —   1,995   1,574   3,166   —   1,183   1,983 
Total assets at fair value $12,126  $—  $3,964  $8,162  $12,674  $—  $2,899  $9,775 
Total liabilities at fair value $—  $—  $—  $—  $—  $—  $—  $— 
                
 December 31, 2016 
 Total  Level 1  Level 2  Level 3 
Impaired loans $9,536  $—  $2,168  $7,368 
Other real estate owned  4,427   —   3,408   1,019 
Total assets at fair value $13,963  $—  $5,576  $8,387 
Total liabilities at fair value $—  $—  $—  $— 

  December 31, 2017 
  Total  Level 1  Level 2  Level 3 
Impaired loans $7,915  $—  $1,306  $6,609 
Other real estate owned  2,791   —   1,203   1,588 
Total assets at fair value $10,706  $—  $2,509  $8,197 
Total liabilities at fair value $—  $—  $—  $— 

 

Impaired loans

 

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310,Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At March 31, 20172018 and December 31, 2016,2017, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and/or deemed to be invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan within Level 2.


The Company may also identify collateral deterioration based on current market sales data, including price and absorption, as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site inspections by Company personnel. When management determines that the fair value of the collateral is further impaired below the appraised value, due to such things as absorption rates and market conditions, and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. In instances where an appraisal received subsequent to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest rate is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

22

 

Bank premises and equipment held for sale

 

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

 

Other real estate owned

 

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO property, establishing a new cost basis. Subsequent to the transfer, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value less estimated disposal costs. 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 foreclosed asset within Level 2. When an appraised value is not available or management determines that the fair value of the collateral is further impaired below the appraised value due to such things as absorption rates and market conditions, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.

 

Fair Value of Financial Instruments

 

FASB ASC 825,Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair valuemeasures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

 

  March 31, 2017 
  Carrying Value  

Estimated Fair

Value

  Level 1  Level 2  Level 3 
Financial assets:                    
Securities held to maturity $46,500  $46,881  $—  $46,881  $— 
Loans, net of allowance  842,713   846,180   —   839,592   6,588 
PCI loans, net of allowance  49,538   55,408   —   —   55,408 
                     
Financial liabilities:                    
Interest bearing deposits  923,630   924,471   —   924,471   — 
Long-term borrowings  85,816   85,711   —   85,711   — 

 December 31, 2016  March 31, 2018 
 Carrying Value  

Estimated Fair

Value

  Level 1  Level 2  Level 3  Carrying Value  

Estimated Fair

Value

  Level 1  Level 2  Level 3 
Financial assets:                                        
Securities held to maturity $46,608  $46,858  $1,093  $45,765  $—  $44,534  $44,578  $—  $44,578  $— 
Loans, net of allowance  826,806   829,349   —   821,981   7,368   955,343   961,245   —       961,245 
PCI loans, net of allowance  51,764   57,100   —   —   57,100   42,015   46,345   —   —   46,345 
                                        
Financial liabilities:                                        
Interest bearing deposits  908,407   909,627   —   909,627   —   946,283   945,267   —   945,267   — 
Long-term borrowings  87,681   87,611   —   87,611   — 
Borrowings  105,185   104,859   —   104,859   — 

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of March 31, 2017. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

23

 

Financial Assets

Cash and cash equivalents

 

The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair value (Level 1).

Securities held to maturity

For securities held to maturity, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).

Restricted securities

The carrying value of restricted securities approximates their fair value based on the redemption provisions of the respective issuer (Level 2).

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above.

PCI loans

Fair values for PCI loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were pooled together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on market rates for new originations of comparable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value (Level 2).


Financial Liabilities

Noninterest bearing deposits

The carrying amount of noninterest bearing deposits approximates fair value (Level 2).

Interest bearing deposits

The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased

The carrying amount of federal funds purchased approximates fair value (Level 2).

Long-term borrowings

The fair values of the Company’s long-term borrowings, such as FHLB advances and long-term debt, are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest payable

The carrying amounts of accrued interest payable approximate fair value (Level 2).

Off-balance sheet financial instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

  December 31, 2017 
  Carrying Value  

Estimated Fair

Value

  Level 1  Level 2  Level 3 
Financial assets:                    
Securities held to maturity $46,146  $46,888  $—  $46,888  $— 
Loans, net of allowance  933,049   933,938   —   927,329   6,609 
PCI loans, net of allowance  44,133   48,655   —   —   48,655 
                     
Financial liabilities:                    
Interest bearing deposits  942,736   943,037   —   943,037   — 
Borrowings  105,553   105,363   —   105,363   — 

 

Note 9. Earnings Per Common Share

 

Basic earnings per common share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive common shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three months ended March 31, 20172018 and 20162017 (dollars and shares in thousands, except per share data):


  Net Income
(Numerator)		  Weighted Average
Common Shares
(Denominator)		  Per Common
Share Amount		 
For the three months ended March 31, 2017            
Basic EPS $2,493   21,962  $0.11 
Effect of dilutive stock awards  —   471   — 
Diluted EPS $2,493   22,433  $0.11 
             
For the three months ended March 31, 2016            
Basic EPS $2,420   21,873  $0.11 
Effect of dilutive stock awards  —   192   — 
Diluted EPS $2,420   22,065  $0.11 

  Net Income (Loss)
(Numerator)		  Weighted Average
Common Shares
(Denominator)		  Per Common
Share Amount		 
For the three months ended March 31, 2018            
Basic EPS $2,594   22,076  $0.12 
Effect of dilutive stock awards  —   445   — 
Diluted EPS $2,594   22,521  $0.12 
             
For the three months ended March 31, 2017            
Basic EPS $2,493   21,962  $0.11 
Effect of dilutive stock awards  —   471   — 
Diluted EPS $2,493   22,433  $0.11 

 

Antidilutive common shares issuable under awards or options of 279,000 were excluded from the computation of diluted earnings per common share for the three months ended March 31, 2018. There were no antidilutive exclusions from the computation of diluted earnings per common share for the three months ended March 31, 2017. Antidilutive common shares issuable under awards or options of 263,000 were excluded from the computation of diluted earnings per common share for the three months ended March 31, 2016.

 

Note 10. Employee Benefit Plan

 

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

 

The Company has frozen the plan benefits for all the defined benefit plan participants effective December 31, 2010.

 

The following table provides the components of net periodic benefit cost for the plan for the three months ended March 31, 20172018 and 20162017 (dollars in thousands):

 

 Three months ended  Three months ended 
 March 31, 2017  March 31, 2016  March 31, 2018  March 31, 2017 
Interest cost $39  $48  $39  $39 
Expected return on plan assets  (70)  (82)  (59)  (70)
Amortization of prior service cost  1   1   1   1 
Recognized net loss due to settlement  —   13 
Recognized net actuarial loss  12   13   15   12 
Net periodic benefit cost $(18) $(7) $(4) $(18)

 

24

In accordance with FASB ASC 715,Compensation-Retirement Benefits, settlement accounting is triggered when lump sum payments to plan participants exceed the sum of the plan’s service cost and interest cost for the year. The impact of settlement accounting is that a percentage of any outstanding losses that the plan is currently amortizing must be recognized immediately.  This percentage is calculated as the ratio of lump sums paid to the total liability for the plan.  This amount changes as plan participants retire during the year.


Note 11. Cash Flow Hedge

 

On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million.  The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years.  The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

 

The swap was entered into with a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had $0 and $390,000 of cash pledged as collateral for each of the periods ended March 31, 20172018 and December 31, 2016.2017, respectively.

 

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815,Derivatives and Hedging, the Company has designated the swap as a cash flow hedge, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be effective for the three months ended March 31, 20172018 and 2016.2017. The fair value of the Company’s cash flow hedge was an unrealized gain of $12,000$363,000 and an unrealized loss of $70,000$177,000 at March 31, 20172018 and December 31, 2016,2017, respectively, and was recorded in other assets and other liabilities, respectively.assets. The gain and loss werewas recorded as a component of other comprehensive income net of associated tax effects.

 

Note 12. Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606),and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service charges on deposit accounts

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

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Interchange fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers, related costs are netted against the fee income. These costs were included in other operating expenses prior to the adoption of Topic 606.

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to its customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period.

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017 (dollars in thousands):

  Three months ended 
  March 31, 2018  March 31, 2017 
Noninterest income        
In-scope of Topic 606:        
Service charges on deposit accounts $391  $370 
Interchange fees  190   155 
Brokerage fees and commissions  61   80 
Noninterest income (in-scope of Topic 606)  642   605 
Noninterest income (out-of-scope of Topic 606)  440   430 
Total noninterest income $1,082  $1,035 

Note 13. Branch Closing

The Company will close its Prince Street branch located in Tappahanock, Virginia as of the close of business June 29, 2018. From a historical perspective, when the Company opened its Dillard branch, also in Tappahannock, the Company’s intention was to consolidate the Prince Street branch into the newer Dillard branch, which was built as a larger and modern banking facility. The Company is now following through with its intention.

The Prince Street branch building is being marketed for sale. The book value of $525,000 reflects the lower of cost or fair market value at March 31, 2018.

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

The following discussion and analysis of the financial condition at March 31, 20172018 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three months ended March 31, 20172018 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

OVERVIEW

 

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2326 full-service offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

 

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

 

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. Additionally, the Bank earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products. Other sources of noninterest income can include gains or losses on securities transactions, mortgage loan income and income from Bank Owned Life Insurancebank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, professional fees, transactions involving bank-owned property, the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may materially affect net income.


CAUTION ABOUT FORWARD-LOOKING STATEMENTS

 

The Company makes certain forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, future strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

 

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

 

·the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

 

·assumptions that underlie the Company’s allowance for loan losses;

 

·general economic and market conditions, either nationally or in the Company’s market areas;

 

·the interest rate environment;

 

·competitive pressures among banks and financial institutions or from companies outside the banking industry;

 

·real estate values;

 

·the demand for deposit, loan, and investment products and other financial services;

 

·the demand, development and acceptance of new products and services;

 

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·the performance of vendors or other parties with which the Company does business;

 

·time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

 

·the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

 

·assumptions and estimates that underlie the accounting for purchased credit impaired loans;

 

·consumer profiles and spending and savings habits;

 

·levels of fraud in the banking industry;

 

·the level of attempted cyber attacks in the banking industry;

 

·the securities and credit markets;

 

·costs associated with the integration of banking and other internal operations;

 

·the soundness of other financial institutions with which the Company does business;

 

·inflation;

 

·technology; and

 

·legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

 

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

 

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

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Allowance for Loan Losses on Loans

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

 

·Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

·Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

·Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

·Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

·Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

·Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

·Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

·Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

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·All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

 

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

 

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component covers uncertainties that could affect management’s estimate of probable losses.

 

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 or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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 the 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 by either the present value of the 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.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.


Accounting for Certain Loans Acquired in a Transfer

 

FASB ASC 310,Receivables,requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

 

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805,Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

 

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

 

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The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

Other Real Estate Owned

 

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.

Other Intangible Assets

The Company is accounting for other intangible assets in accordance with FASB ASC 350,Intangibles -Goodwill and Others. Under FASB ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC 350.

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Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties during the three months ended March 31, 20172018 and 2016.2017. Under FASB ASC 740,Income Taxes,a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable.realizable; therefore, no allowance is required.

 

The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax. All years from 20132014 through 20162017 are open to examination by the respective tax authorities.

RESULTS OF OPERATIONS

 

Overview

 

Net income was $2.5$2.6 million for the first quarter of 2017,2018, compared with $2.4net income of $2.5 million in the first quarter of 2016.2017. Earnings per common share, basic and fully diluted, were $0.12 per share and $0.11 per share for each of the three months ended March 31, 2018 and 2017, and 2016, respectively.

The increase of $101,000, or 4.1%, in net income, of $73,000, or 3.0%, for the first quarter of 20172018 compared with the first quarter of 20162017 was due toprimarily the result of a $910,000$1.1 million increase in interest income and dividend income.a reduction of $536,000 in income tax expense. Offsetting this increasethese increases was an increase of $420,000 in noninterest expenses, a decrease of $168,000 in noninterest income, an increase of $156,000$531,000 in interest expense and an increase of $93,000$1.1 million in income tax expense.noninterest expenses, including an increase of $703,000 in group benefit costs.

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Net Interest Income

 

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

 

Net interest income increased $754,000,$600,000, or 7.5%5.5%, from the first quarter of 20162017 to the first quarter of 2018. Net interest income was $11.5 million in the first quarter of 2018 compared with $10.9 million for the same period in 2017. Interest income increased $910,000,$1.1 million, or 7.6%8.7%, over this time period. The increase in interest income was generated by a combination of an increase of 6.9%,$86.7 million, or $74.9 million,7.4%, in the level of earning assets, coupled with an increase of eight basis points in the tax-equivalent yield earned on those assets. The yield on earning assets increaseddecreased from 4.53%4.61% in the first quarter of 20162017 to 4.61%4.60% in the first quarter of 2018. The average balance of loans, excluding PCI loans, increased $104.2 million, or 12.4%, from $839.2 million in the first quarter of 2017 to $943.4 million in the first quarter of 2018. Interest income on securities was $1.8 million in each of the first quarter of 2018 and first quarter of 2017. On a tax-equivalent basis, the yield on investment securities was 2.98% in the first quarter of 2018, based on a 21% tax rate, and 3.22% in the first quarter of 2017, based on a 34% tax rate.

Interest on PCI loans was $1.4 million in the first quarter of 2018 compared with $1.5 million in the first quarter of 2017. The average balance of loans, excluding PCI loans, increased $85.5 million, or 11.3%, from $753.6 million in the first quarter of 2016 to $839.2 million in the first quarter of 2017. Interest income on securities was $2.2 million on a tax-equivalent basis in each of the first quarters of 2016 and 2017.

Interest on PCI loans was $1.5 million in the first quarter of 2017 compared with $1.6 million in the first quarter of 2016. The average balance of the PCI portfolio declined $7.1$7.4 million during the year-over-year comparison period.

 

Interest expense increased $156,000,$531,000, or 8.1%25.5%, when comparing the first quarter of 20162017 and the first quarter of 2017.2018. Interest expense on deposits increased $228,000,$364,000, or 14.7%20.5%, as the average balance of interest bearing deposits increased $64.9$41.3 million, or 7.7%4.6%. The increase in deposit cost was driven by higheran increase in NOW and MMDA average balances, which increased a combined $62.5 million year-over-year. Likewise, the cost of these balances increased $189,000, from 0.24% to 0.45%, over the same time frame. Higher cost time depositsdeposit balances declined over the comparison period by $22.4 million; however, expense on this category increased by $176,000, resulting in an increase in cost from 1.11% to fund loan growth.1.29%. FHLB and other borrowings increased, on average, $15.6 million year-over-year, and there was an increase in the rate paid, from 1.33% in the first quarter of 2017 to 1.74% in the first quarter of 2018. This resulted in an increase in the expense of $162,000, to $458,000 in the first quarter of 2018. The average balance of FHLB and other borrowings was $105.5 million in the first quarter of 2018. Overall, the Bank’s cost of interest bearing liabilities increased only four15 basis points, from 0.81% in the first quarter of 2016 to 0.85% in the first quarter of 2017.2017 to 1.00% in the first quarter of 2018.


The tax-equivalent net interest margin increased fivedecreased 12 basis points, from 3.83% in the first quarter of 2016 to 3.88% in the first quarter of 2017.2017 to 3.76% in the first quarter of 2018. Likewise, the net interest spread increaseddecreased from 3.72%3.76% to 3.76%3.60% over the same time period.  The increasedecrease in the margin was precipitated by the increase in the cost of interest bearing liabilities without a corresponding increase in the yield on earning asset yields of eight basis points.assets and the decrease in the tax benefit derived from tax exempt securities resulting from the decrease in the Company’s corporate federal tax rate.

 

The following table sets forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three months ended March 31, 20172018 and 2016.2017. The table also sets forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield.

 

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NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

(Dollars in thousands)

 

 Three months ended March 31, 2017  Three months ended March 31, 2016  Three months ended March 31, 2018  Three months ended March 31, 2017 
      Average       Average       Average       Average 
 Average Interest Rates Average Interest Rates  Average Interest Rates Average Interest Rates 
 Balance Income/ Earned/ Balance Income/ Earned/  Balance Income/ Earned/ Balance Income/ Earned/ 
 Sheet  Expense  Paid  Sheet  Expense  Paid  Sheet  Expense  Paid  Sheet  Expense  Paid 
ASSETS:                                                
Loans, including fees $839,167  $9,597   4.64% $753,632  $8,553   4.55% $943,398  $10,876   4.68% $839,167  $9,597   4.64%
PCI loans, including fees  50,777   1,479   11.65   57,861   1,599   11.08   43,331   1,398   12.91   50,777   1,479   11.65 
Total loans  889,944   11,076   5.05   811,493   10,152   5.02   986,729   12,274   5.05   889,944   11,076   5.05 
Interest bearing bank balances  9,134   26   1.13   9,993   21   0.85   9,060   40   1.80   9,134   26   1.13 
Federal funds sold  49   -   0.88   -   -   -   58   -   1.55   49   -   0.88 
Securities (taxable)  183,247   1,249   2.73   184,661   1,271   2.75   176,563   1,186   2.69   183,247   1,249   2.73 
Securities (tax exempt)(1)  84,726   905   4.27   86,057   900   4.19   81,342   733   3.60   84,726   905   4.27 
Total earning assets  1,167,100   13,256   4.61   1,092,204   12,344   4.53   1,253,752   14,233   4.60   1,167,100   13,256   4.61 
Allowance for loan losses  (9,722)          (10,078)          (9,177)          (9,722)        
Non-earning assets  88,613           81,829           88,610           88,613         
Total assets $1,245,991          $1,163,955          $1,333,185          $1,245,991         
                                                
LIABILITIES AND SHAREHOLDERS' EQUITY                                                
                                                
Demand - interest bearing $238,829   142   0.24  $230,660   173   0.30  $301,313   331   0.45  $238,829   142   0.24 
Savings  91,936   61   0.27   83,129   63   0.30   93,107   60   0.26   91,936   61   0.27 
Time deposits  574,344   1,576   1.11   526,468   1,315   1.00   551,987   1,752   1.29   574,344   1,576   1.11 
Total deposits  905,109   1,779   0.80   840,257   1,551   0.74 
Total interest bearing deposits  946,407   2,143   0.92   905,109   1,779   0.80 
Short-term borrowings  2,104   6   1.08   2,798   5   0.75   2,343   11   1.95   2,104   6   1.08 
FHLB and other borrowings  89,975   296   1.33   104,016   307   1.18   105,532   458   1.74   89,975   296   1.33 
Long-term debt  -   -   -   5,666   62   4.36 
Total interest bearing liabilities  997,188   2,081   0.85   952,737   1,925   0.81   1,054,282   2,612   1.00   997,188   2,081   0.85 
Noninterest bearing deposits  126,827           98,792           148,371           126,827         
Other liabilities  5,414           5,053           5,542           5,414         
Total liabilities  1,129,429           1,056,582           1,208,195           1,129,429         
Shareholders' equity  116,562           107,373           124,990           116,562         
                                                
Total liabilities and shareholders' equity $1,245,991          $1,163,955          $1,333,185          $1,245,991         
Net interest earnings     $11,175          $10,419          $11,621          $11,175     
Net interest spread          3.76%          3.72%
Interest spread          3.60%          3.76%
Net interest margin          3.88%          3.83%          3.76%          3.88%
                                                
Tax equivalent adjustment:                                                
Securities     $308          $306          $155          $308     

 

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

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(1)Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21% for 2018 and 34% for 2017.

 

Provision for Loan Losses

 

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

 

Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

 

Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

 

The Company did not record aThere was no provision for loan losses inon the loan portfolio, excluding PCI loans, during either of the three months ended March 31, 2017first quarter of 2018 or 2016 with respect to either its loan portfolio or its PCI loan portfolio.  With respect to the loan portfolio, thisfirst quarter of 2017. The absence of a provision in the first quarter of 2018 was the direct result of nominal charge-offs and the ongoing stabilization ofstable asset quality. There was no provision for loan losses on the PCI loan portfolio during the first quarter of 2018 or the first quarter of 2017. Additional discussion of loan quality is presented below.

 

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There were net charge-offs of $1,000 in the first quarter of 2018, compared with net recoveries of $20,000 in the first quarter of 2017,2017.  Total charge-offs were $84,000 for the first quarter of 2018 compared with net recoveries of $35,000$85,000 in the first quarter of 2016.  Total charge-offs for the first quarter of 2017 were $85,000 compared with $138,000 in the first quarter of 2016.2017.  Recoveries of previously charged-off loans were $105,000$83,000 for the first quarter of 20172018 compared with $173,000$105,000 in the first quarter of 2016.2017.

Noninterest Income

 

Noninterest income decreased $168,000,increased $47,000, or 12.7%4.5%, from $1.0 million in the first quarter of 2017 to $1.1 million in the first quarter of 2018. Mortgage loan income increased $78,000, or 236.4%, from $33,000 in the first quarter of 2017 to $111,000 in the first quarter of 2018. The increase in mortgage loan income reflects continued momentum from a shift that began in the fourth quarter of 2016 to a less expensive platform program. Service charges and fees increased $56,000, or 10.7%, and were $581,000 in the first quarter of 2018 compared with $525,000 in the first quarter of 2017. Gains on securities transactions declined $164,000$65,000 over this time frame as securitiesand were liquidated$30,000 in the first quarter of 20162018 versus $95,000 in the first quarter of 2017. There has been less activity in the securities portfolio in 2018 as the Company maintains the level of securities to fund loan growth. Mortgage loantotal assets near a target close to the 18.9% reflected at March 31, 2018. Other noninterest income declined $140,000 year-over-year and was $33,000decreased from $148,000 in the first quarter of 2017 compared with $173,000to $128,000 in the first quarter of 2016. The Company discontinued a wholesale mortgage operation at the end of the third quarter of 2016 and has shifted to a platform that is less expensive but has equivalent or better net revenue potential. Offsetting these decreases were an increase of $74,000 in service charge income, which was $643,000 in the first quarter of 2017, and an increase of $46,000 in income on bank owned life insurance, which was $234,000 in the first quarter of 2017. Other2018. Within other noninterest income, increased from $132,000 in the first quarter of 2016 to $148,000 in the first quarter of 2017.brokerage fees and commissions declined by $18,000 year-over-year.

 

Noninterest Expense

 

Noninterest expenseexpenses increased $420,000,$1.1 million, or 5.2%13.0%, when comparing the first quarter of 20172018 to the same period in 2016. Other real estate (income) expense, up $129,000, exhibited the largest2017. The increase year-over-year followedwas largely attributable to abnormally higher than usual group benefit costs, which increased by occupancy expenses, up $91,000, data processing expense, up $73,000, salaries and employee benefits, up $71,000, other operating expenses, up $61,000, and equipment expenses, up $45,000. The increase on other real estate (income) expense reflects a gain of $152,000 in bank owned property sales$703,000 in the first quarter of 2016. These higher remaining expenses for2018 over the same period in 2017. Salaries and employee benefits increased $1.2 million, or 26.0%, from $4.7 million in the first quarter of 2017 were the result of staffing and equipping two new full service banking offices opened after the end ofto $5.9 million in the first quarter of 2016.2018. Other operating expenses increased $207,000, or 14.4%, and were $1.6 million in the first quarter of 2018 compared with $1.4 million for the same period in 2017. Occupancy expenses increased $80,000 year-over-year and were $812,000 in the first quarter of 2018 compared with $732,000 in the first quarter of 2017. Since the beginning of 2017, the Bank has opened three full service banking facilities, one office in West Broad Marketplace in the Short Pump area of Richmond and two offices in Lynchburg. These openings also resulted in an increase year-over-year in equipment expenses, which increased $30,000, from $284,000 to $314,000. Other real estate expenses, net, of $50,000 in the first quarter of 2018 represented a year-over-year increase of $23,000. FDIC assessment declined $50,000 year-over-year, due to lower assessment rates bywas $206,000 in the FDIC.first quarter of 2018 compared with $201,000 for the same period in 2017. Data processing fees of $486,000 in the first quarter of 2018 compared with $488,000 for the same period in 2017. Offsetting these increases was a decline of $477,000 in amortization of intangibles, which expired during 2017 and was $0 in the first quarter of 2018.

 

Income Taxes

 

Income tax expense was $1.1 million$540,000 for the three months ended March 31, 2017,2018, compared with income tax expense of $1.0$1.1 million for the first quarter of 2016.2017. The effective tax rate for the first quarter of 2018 was 17.2% versus 30.1% for the first quarter of 2017 versus 28.9% for2017. The decrease in the first quarterCompany’s effective tax rate resulted principally from the decrease in its applicable federal corporate tax rate from 34% to 21% as a result of 2016.the Tax Cuts and Jobs Act.

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FINANCIAL CONDITION

 

General

 

Total assets increased $12.9$17.0 million, or 1.0%1.3%, to $1.263$1.353 billion at March 31, 2017 as2018 when compared to December 31, 2016.2017. Total loans, excluding PCI loans, were $852.2$964.3 million at March 31, 2017,2018, increasing $15.9$22.3 million, or 1.9%2.4%, from year end 2016.2017.  Total PCI loans were $49.7$42.2 million at March 31, 20172018 versus $52.0$44.3 million at the prior quarter end.December 31, 2017.

 

During the first quarter of 2017, multifamily2018, commercial loans grew $10.4$11.4 million, or 26.6%7.2%, and were $49.5$170.4 million at March 31, 2017.2018. Consumer installment loans grew $8.7 million and were $13.9 million at March 31, 2018. On March 30, 2018, the Company purchased an in-market, high quality consumer auto loan pool totaling $9.0 million. The addition of these loans will bring an increase in diversification to the portfolio. Commercial mortgage loans on real estate grew by $3.8$5.2 million, or 1.1%1.4%, and were $343.6$371.5 million at March 31, 2017.2018. Residential 1-4 family loans grew $2.7declined $4.8 million, or 1.3%2.1%, during the first quarter of 20172018 and were $210.5$222.7 million at March 31, 2017. Commercial loans grew $1.4 million, or 1.1%, and were $130.7 million at March 31, 2017.2018.

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The Company’s securities portfolio, excluding restricted equity securities, declined $2.5$4.3 million or 1.0%, from $262.7 million at December 31, 2016since year end 2017 to $260.2total $246.7 million at March 31, 2017.2018. Net gains of $30,000 were recognized during the first quarter of 2018 through sales and call activity, and net gains of $95,000 were recognized during the first quarter of 2017 through sales and call activity, as compared with $259,000 recognized during the first quarter of 2016.2017. The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile.

 

The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under FASB ASC 320,Investments – Debt and Equity Securities. The market value of the AFS portfolio was $213.7$202.2 million at March 31, 20172018 and $216.1$204.8 million at December 31, 2016.2017. At March 31, 2017,2018, the Company had a net unrealized gainloss on the AFS portfolio of $53,000$1.3 million compared with a net unrealized lossgain of $621,000$1.2 million at December 31, 2016.2017. Municipal securities comprised 59.5%61.1% of the total AFS portfolio at March 31, 2017.2018. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

 

The Company had cash and cash equivalents of $23.9$21.3 million and $21.0$22.0 million at March 31, 20172018 and December 31, 2016,2017, respectively. There were federal funds purchased of $20.0 million and federal funds sold of $132,000$152,000 at March 31, 20172018 compared with federal funds purchased of $4.7$4.8 million at December 31, 2016.2017. The increase in federal funds purchased at March 31, 2018 was used to fund loan growth in the first quarter of 2018 and is anticipated to be short-term in nature. Interest bearing bank balances were $9.1 million at March 31, 2018 compared with $7.3 million at December 31, 2017.

 

Interest bearing deposits at March 31, 20172018 were $923.6$946.3 million, an increase of $15.2$3.5 million from December 31, 2016. As a result of a certificate of deposit (CD) campaign2017. Money market balances grew $5.0 million since December 31, 2017. NOW accounts declined $2.8 million during the first quarter of 2017, time2018. Time deposits over $250,000 increased $3.9 million during the first quarter of 2018. Driving the changes were brokered deposits, which increased $2.4 million during the first quarter of 2018. The increase in money market and over increased $16.2 million and timeNOW account balances has allowed the Company to replace wholesale funding with core retail deposits. Time deposits less than or equal to $250,000 increased $11.4 million. This $27.6declined $2.3 million growth in CDs was partially offset by a declineduring the first quarter of $8.3 million in MMDA balances and a decline of $6.4 million in NOW accounts.2018.

 

FHLB advances were $81.7$101.1 million at March 31, 2017,2018, compared with $81.9$101.4 million at December 31, 2016. Long term debt was $0 at March 31, 2017 and totaled $1.7 million at December 31, 2016. This borrowing, now fully paid-off, was initially in the amount of $10.7 million and was obtained in April 2014 to redeem the Company’s remaining outstanding TARP preferred stock.2017.

 

Shareholders’ equity was $117.7$125.0 million at March 31, 20172018 and $114.5$124.0 million at December 31, 2016. The ratio of shareholder’s2017. Shareholder’s equity to assets was 9.32%9.2% at March 31, 2017, compared with 9.16%2018 and 9.3% at December 31, 2016.2017. Total shareholders’ equity increased through retained earnings from net income but was negatively impacted by the rise in interest rates, which impacted accumulated other comprehensive (loss) income due to the effect on the fair value of available-for-sale securities.

 

Asset Quality – excluding PCI loans

 

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

 

Loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.


The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled $12.8$13.3 million at March 31, 20172018 and net recoveriescharge-offs were $20,000$1,000 for the three months ended March 31, 2017.2018. This compares with nonperforming assets of $14.7$11.8 million and net charge-offs of $516,000$1.1 million at and for the year ended December 31, 2016.2017.

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Nonperforming loans were $9.2$10.1 million at March 31, 2017,2018, a $1.0$1.1 million decreaseincrease from $10.2$9.0 million at December 31, 2016.2017. The $1.0$1.1 million decreaseincrease in nonperforming loans since December 31, 20162017 was the net result of $443,000$1.4 million in additions to nonperforming loans and $1.5 million$293,000 in reductions. The increase related mainly to two residential 1-4 family construction relationships comprised of four loans totaling $1.3 million. With respect to the reductions in nonperforming loans, $87,000$249,000 were payments to existing credits $40,000and $44,000 were charge-offs, $145,000 were loans returned to accruing status, and $1.2 million paid off.charge-offs.

 

The allowance for loan losses, excluding PCI, equaled 104.64%88.88% of nonaccrual loans at March 31, 20172018 compared with 92.68%99.37% at December 31, 2016. The ratio of the allowance for loan losses to total nonperforming assets was 76.05% at March 31, 2017, compared with 66.07% at December 31, 2016.2017.  The ratio of nonperforming assets to loans and OREO continued to decline.increased. The ratio was 1.49%1.37% at March 31, 20172018 versus 1.74%1.25% at December 31, 2016.2017.

 

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructures and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

 

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At March 31, 20172018 and December 31, 2016,2017, total impaired loans, excluding PCI loans, equaled $13.7$15.3 million and $18.5$14.3 million, respectively.

 

The following table sets forth selected asset quality data, excluding PCI loans, and ratios for the dates indicated (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
Nonaccrual loans $9,091  $10,243  $10,090  $9,026 
Loans past due 90 days and accruing interest  112   —   —   — 
Total nonperforming loans  9,203   10,243   10,090   9,026 
OREO  3,569   4,427   3,166   2,791 
Total nonperforming assets $12,772  $14,670  $13,256  $11,817 
                
Accruing troubled debt restructure loans $4,616  $4,653  $5,232  $5,271 
                
Balances                
Specific reserve on impaired loans  950   1,130   1,093   959 
General reserve related to unimpaired loans  8,563   8,363   7,875   8,010 
Total allowance for loan losses  9,513   9,493   8,968   8,969 
Average loans during the year, net of unearned income  839,167   787,245   943,398   870,258 
                
Impaired loans  13,706   18,541   15,322   14,297 
Non-impaired loans  838,520   817,758   948,989   927,721 
Total loans, net of unearned income  852,226   836,299   964,311   942,018 
        
Ratios                
Allowance for loan losses to loans, excluding PCI loans, to loans  1.12%  1.14%
Allowance for loan losses to nonperforming assets  76.05   66.07 
Allowance for loan losses, excluding PCI loans, to nonaccrual loans  104.64   92.68 
Allowance for loan losses to loans  0.93%  0.95%
Allowance for loan losses to nonaccrual loans  88.88   99.37 
General reserve to non-impaired loans  1.02   1.02   0.83   0.86 
Nonaccrual loans to loans  1.07   1.22   1.05   0.96 
Nonperforming assets to loans and OREO  1.49   1.74   1.37   1.25 
Net (recoveries) charge-offs to average loans  (0.01)  0.07 
Net charge-offs to average loans  —   0.12 


36

The Company grants troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At March 31, 2017,2018, the Company had 1723 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. FiveSix of these loans were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at March 31, 20172018 was $6.6$6.2 million, of which $2.0 million$947,000 were classified as nonaccrual.

 

The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan into a “good loan” (the A loan) and a “bad loan” (the B loan). The impact on interest is positive because the Bank is collecting interest on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to the Bank’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or “loss”. An impairment analysis is performed on the B loan and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is established.

 

The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

 

A further breakout of nonaccrual loans, excluding PCI loans, at March 31, 20172018 and December 31, 20162017 is below (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
Mortgage loans on real estate:                
Residential 1-4 family $3,104  $2,893  $1,985  $1,962 
Commercial  1,588   1,758   1,466   1,498 
Construction and land development  4,304   5,495   5,554   4,277 
Agriculture  67   68 
Total real estate loans  8,996   10,146   9,072   7,805 
Commercial loans  53   53   1,014   1,214 
Consumer installment loans  42   44   4   7 
Total loans $9,091  $10,243  $10,090  $9,026 

 

At March 31, 2017,2018, the Company had sixeight construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed and are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at March 31, 20172018 was $4.3$5.6 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

 

37

The total amount of the allowance for loan losses attributed to all sixeight relationships was $538,000$694,000 at March 31, 2017,2018, or 12.5%12. 5% of the total credit exposure outstanding. The Company establishes its reserves as described above inAllowance for Loan Losses on Loans in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 18 months and/or deemed to be invalid. The Company uses a ratio analysis for balances less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

 

Asset Quality – PCI loans

 

Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.


The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which include undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairment in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

 

Capital Requirements

 

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base exceeding regulatory minimums for well capitalized institutions to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

 

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on three definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the loan loss allowance. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The leverage ratio is tier 1 capital divided by total average assets.

 

The Company’s ratio of total risk-based capital was 13.3%12.6% at March 31, 20172018 compared with 13.2%12.7% at December 31, 2016.2017. The tier 1 risk-based capital ratio was 12.3%11.8% at March 31, 20172018 and 12.2%11.9% at December 31, 2016.2017. The Company’s tier 1 leverage ratio was 9.8% at March 31, 20172018 and 9.6%9.7% at December 31, 2016.2017.  All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 11.9%11.4% at March 31, 20172018 and 11.8%11.5% at December 31, 2016.2017.

 

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Company does not maintain the full amount of the buffer. The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019. At March 31, 2017,2018, the Company had a capital conservation buffer of 5.2%4.6%, well above the 20172018 required buffer of 1.25%1.875%.

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Liquidity

 

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

 

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at March 31, 20172018 and December 31, 20162017 was as follows (dollars in thousands):

 

  March 31, 2017  December 31, 2016 
Cash and due from banks $11,720  $13,828 
Interest bearing bank deposits  12,002   7,244 
Federal funds sold  132   — 
Available for sale securities, at fair value, unpledged  171,976   170,898 
Total liquid assets $195,830  $191,970 
         
Deposits and other liabilities $1,145,008  $1,135,280 
Ratio of liquid assets to deposits and other liabilities  17.10%  16.91%

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  March 31, 2018  December 31, 2017 
Cash and due from banks $12,013  $14,642 
Interest bearing bank deposits  9,141   7,316 
Federal funds sold  152   — 
Available for sale securities, at fair value, unpledged  167,103   168,221 
Total liquid assets $188,409  $190,179 
         
Deposits and other liabilities $1,228,188  $1,212,187 
Ratio of liquid assets to deposits and other liabilities  15.34%  15.69%

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of March 31, 20172018 and December 31, 2016,2017, is as follows (dollars in thousands):

 

 March 31, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
Commitments with off-balance sheet risk:                
Commitments to extend credit $134,108  $134,517  $171,080  $163,686 
Standby letters of credit  6,437   7,151   6,792   6,532 
Total commitments with off-balance sheet risks $140,545  $141,668  $177,872  $170,218 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

 

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

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On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million.  The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years.  The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

 

The fair value of the Company’s cash flow hedge was an unrealized gain of $12,000$363,000 and an unrealized loss of $70,000$177,000 at March 31, 20172018 and December 31, 2016,2017, respectively, which was recorded in other assets and other liabilities, respectively.assets. The Company’s cash flow hedge is deemed to be effective. Therefore, the gain and loss werewas recorded as a component of other comprehensive (loss) income recorded in the Company’s Consolidated Statements of Comprehensive Income.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.


Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

 

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month period is assumed.

 

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at March 31, 20172018 (dollars in thousands):

 

 March 31, 2017  March 31, 2018 
 %  $  %  $ 
Change in Yield curve                
+400 bp  3.7   1,577   2.1   954 
+300 bp  2.6   1,142   1.8   841 
+200 bp  1.8   775   1.4   624 
+100 bp  0.9   382   0.6   273 
most likely  —   —   —   — 
-100 bp  (1.0)  (447)  (0.8)  (358)
-200 bp  (3.0)  (1,299)  (3.3)  (1,525)
-300 bp  (3.2)  (1,391)  (4.7)  (2,155)
-400 bp  (3.2)  (1,395)  (4.8)  (2,174)

 

At March 31, 2017,2018, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 3.7%2.1%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 3.2%4.8%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

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The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

 

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.


Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and its chief financial officer (“the Certifying(the “Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

 

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated under it.

 

Internal Control over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

 

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Item 1A.  Risk Factors

 

As of the date of this report, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

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

 

None.

 

Item 3.  Defaults upon Senior Securities

 

None.


Item 4.  Mine Safety Disclosures

 

Not applicable

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

Exhibit No. Description
31.1 Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
31.2 Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
32.1 Section 1350 Certifications*
101 Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 20172018 formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

 

*Filed herewith.

 

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SIGNATURES

 

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

 

 COMMUNITY BANKERS TRUST CORPORATION
 (Registrant)
  
 /s/ Rex L. Smith, III
 Rex L. Smith, III
 President and Chief Executive Officer
 (principal executive officer)
Date:  May 9, 2017

Date: May 9, 2018

 /s/ Bruce E. Thomas
 Bruce E. Thomas
 Executive Vice President and Chief Financial Officer
 (principal financial officer)

Date: May 9, 2018

 
Date:  May 9, 201743 

 

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