UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

	For the quarterly period ended ~~September~~June 30, ~~2017~~2018
or
or

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

	For the transition period from to

Commission File Number: 001-32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	20-2652949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9954 Mayland Drive, Suite 2100
Richmond, Virginia	23233
(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 o

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

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

			Emerging growth company	o

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 ~~September~~June 30, ~~2017,~~2018, there were ~~22,047,833~~22,111,495 shares of the Company’s common stock outstanding.

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

~~September~~June 30, ~~2017~~2018

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3127
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4541
Item 4. Controls and Procedures	4742
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	4743
Item 1A. Risk Factors	4743
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4743
Item 3. Defaults upon Senior Securities	4743
Item 4. Mine Safety Disclosures	4743
Item 5. Other Information	4743
Item 6. Exhibits	4844
SIGNATURES	4944

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND DECEMBER 31, ~~2016~~2017

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

	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017*
ASSETS
Cash and due from banks	$	9,750		$	13,828		$	11,607		$	14,642
Interest bearing bank deposits		12,656			7,244			12,020			7,316
Federal funds sold		144			—			180			—
Total cash and cash equivalents		22,550			21,072			23,807			21,958

Securities available for sale, at fair value		210,447			216,121			199,163			204,834
Securities held to maturity, at cost (fair value of $47,325 and $46,858, respectively)		46,460			46,608
Securities held to maturity, at cost (fair value of $43,914 and $46,888, respectively)								43,989			46,146
Equity securities, restricted, at cost		8,356			8,290			8,935			9,295
Total securities		265,263			271,019			252,087			260,275


Loans		889,980			836,299			967,361			942,018
Purchased credit impaired (PCI) loans		45,451			51,964			39,911			44,333
Total loans		935,431			888,263			1,007,272			986,351
Allowance for loan losses (loans of $8,667 and $9,493, respectively; PCI loans of $200 and $200, respectively)		(8,867	)		(9,693	)
Allowance for loan losses (loans of $9,089 and $8,969, respectively; PCI loans of $200 and $200, respectively)								(9,289	)		(9,169	)
Net loans		926,564			878,570			997,983			977,182

Bank premises and equipment, net		29,469			28,357			30,423			30,198
Bank premises and equipment held for sale								552			—
Other real estate owned		2,710			4,427			3,147			2,791
Bank owned life insurance		27,911			27,339			28,466			28,099
Core deposit intangibles, net		20			898
Other assets		19,643			18,134			17,403			15,687
Total assets	$	1,294,130		$	1,249,816		$	1,353,868		$	1,336,190

LIABILITIES
Deposits:
Noninterest bearing	$	145,328		$	128,887		$	151,956		$	153,028
Interest bearing		933,054			908,407			971,944			942,736
Total deposits		1,078,382			1,037,294			1,123,900			1,095,764

Federal funds purchased		—			4,714			—			4,849
Federal Home Loan Bank advances		81,296			81,887			90,691			101,429
Long-term debt		—			1,670
Trust preferred capital notes		4,124			4,124			4,124			4,124
Other liabilities		5,905			5,591			6,509			6,021
Total liabilities		1,169,707			1,135,280			1,225,224			1,212,187

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,047,833 and 21,959,648 shares issued and outstanding, respectively)		220			220
Common stock (200,000,000 shares authorized, $0.01 par value; 22,111,495 and 22,072,523 shares issued and outstanding, respectively)								221			221
Additional paid in capital		147,453			146,667			148,242			147,671
Retained deficit		(23,285	)		(31,128	)		(17,556	)		(23,932	)
Accumulated other comprehensive income (loss)		35			(1,223	)
Accumulated other comprehensive (loss) income								(2,263	)		43
Total shareholders’ equity		124,423			114,536			128,644			124,003
Total liabilities and shareholders’ equity	$	1,294,130		$	1,249,816		$	1,353,868		$	1,336,190

* Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017

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

	Three months ended				Nine months ended					Three months ended					Six months ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016			June 30, 2018			June 30, 2017		June 30, 2018		June 30, 2017
Interest and dividend income
Interest and fees on loans	$	10,127	$	9,156	$	29,676	$	26,582		$	11,353		$	9,952	$	22,229	$	19,549
Interest and fees on PCI loans		1,423		1,549		4,355		4,704			1,274			1,452		2,672		2,932
Interest on federal funds sold		1		—		1		—			1			—		1		—
Interest on deposits in other banks		65		22		143		66			69			53		109		78
Interest and dividends on securities
Taxable		1,171		1,133		3,577		3,528			1,266			1,157		2,452		2,406
Nontaxable		602		547		1,805		1,698			547			606		1,126		1,203
Total interest and dividend income		13,389		12,407		39,557		36,578			14,510			13,220		28,589		26,168
Interest expense
Interest on deposits		2,053		1,550		5,776		4,638			2,355			1,944		4,498		3,723
Interest on borrowed funds		310		354		914		1,091			508			302		977		604
Total interest expense		2,363		1,904		6,690		5,729			2,863			2,246		5,475		4,327
Net interest income		11,026		10,503		32,867		30,849			11,647			10,974		23,114		21,841
Provision for loan losses		150		250		150		450			—			—		—		—
Net interest income after provision for loan losses		10,876		10,253		32,717		30,399			11,647			10,974		23,114		21,841
Noninterest income
Service charges on deposit accounts		678		617		2,011		1,785
Gain on securities transactions, net		48		88		180		608
Service charges and fees											611			582		1,192		1,107
Gain (loss) on securities transactions, net											(16	)		37		14		132
Gain on sale of other loans											53			—		53		—
Income on bank owned life insurance		235		238		704		630			184			192		367		384
Mortgage loan income		59		252		163		599			80			71		191		104
Other		145		150		448		439			223			155		351		303
Total noninterest income		1,165		1,345		3,506		4,061			1,135			1,037		2,168		2,030
Noninterest expense
Salaries and employee benefits		4,998		4,676		14,566		13,848			5,019			4,843		10,868		9,483
Occupancy expenses		857		756		2,329		2,043			769			740		1,581		1,472
Equipment expenses		305		242		849		729			344			260		658		544
FDIC assessment		185		253		550		756			198			164		404		365
Data processing fees		501		410		1,466		1,230			499			477		985		965
Amortization of intangibles		62		477		878		1,430			—			339		—		816
Other real estate expense (income), net		37		28		98		(89	)
Other real estate expense, net											45			34		95		61
Other operating expenses		1,761		1,436		4,957		4,591			1,313			1,528		2,962		2,970
Total noninterest expense		8,706		8,278		25,693		24,538			8,187			8,385		17,553		16,676
Income before income taxes		3,335		3,320		10,530		9,922			4,595			3,626		7,729		7,195
Income tax expense		919		862		2,687		2,726			813			692		1,353		1,768
Net income	$	2,416	$	2,458	$	7,843	$	7,196		$	3,782		$	2,934	$	6,376	$	5,427
Net income per common share — basic	$	0.11	$	0.11	$	0.36	$	0.33
Net income per common share — diluted	$	0.11	$	0.11	$	0.35	$	0.33
Net income per share — basic										$	0.17		$	0.13	$	0.29	$	0.25
Net income per share — diluted										$	0.17		$	0.13	$	0.28	$	0.24
Weighted average number of shares outstanding
Basic		22,041		21,935		22,000		21,902			22,096			21,997		22,086		21,979
Diluted		22,542		22,127		22,491		22,105			22,580			22,424		22,551		22,440

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017

(dollars in thousands)

	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Net income	$	2,416		$	2,458		$	7,843		$	7,196		$	3,782		$	2,934		$	6,376		$	5,427

Other comprehensive income (loss):
Unrealized gains on investment securities:
Change in unrealized gain (loss) in investment securities		66			(488	)		2,001			4,710
Tax related to unrealized gain in investment securities		(23	)		166			(692	)		(1,601	)
Reclassification adjustment for gain in securities sold		(48	)		(88	)		(180	)		(608	)
Tax related to realized gain in securities sold		17			30			62			206
Other comprehensive (loss) income:
Unrealized gain (loss) on investment securities:
Change in unrealized (loss) gain on investment securities														(667	)		1,165			(3,154	)		1,935
Tax related to unrealized loss (gain) on investment securities														147			(407	)		694			(669	)
Reclassification adjustment for loss (gain) on securities sold														16			(37	)		(14	)		(132	)
Tax related to realized (loss) gain on securities sold														(4	)		13			3			45
Defined benefit pension plan:
Tax related to defined benefit pension plan		—			—			11			—			—			11			—			11
Cash flow hedge:
Change in unrealized gain (loss) in cash flow hedge		55			286			86			(391	)		24			(51	)		211			31
Tax related to cash flow hedge		(20	)		(97	)		(30	)		133			(5	)		18			(46	)		(10	)
Total other comprehensive income (loss)		47			(191	)		1,258			2,449
Total other comprehensive (loss) income														(489	)		712			(2,306	)		1,211
Total comprehensive income	$	2,463		$	2,267		$	9,101		$	9,645		$	3,293		$	3,646		$	4,070		$	6,638

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017

(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		28		—		122		—			—			122
Exercise and issuance of employee stock options		52		—		475		—			—			475
Net income		—		—		—		7,196			—			7,196
Other comprehensive income		—		—		—		—			2,449			2,449
Balance September 30, 2016		21,947	$	219	$	146,504	$	(33,854	)	$	1,860		$	114,729
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		21		—		120		—			—			120		77		—		81		—			—			81
Exercise and issuance of employee stock options		67		—		666		—			—			666		—		—		502		—			—			502
Net income		—		—		—		7,843			—			7,843		—		—		—		5,427			—			5,427
Other comprehensive income		—		—		—		—			1,258			1,258		—		—		—		—			1,211			1,211
Balance September 30, 2017		22,048	$	220	$	147,453	$	(23,285	)	$	35		$	124,423
Balance June 30, 2017																22,037	$	220	$	147,250	$	(25,701	)	$	(12	)	$	121,757
Balance January 1, 2018																22,073	$	221	$	147,671	$	(23,932	)	$	43		$	124,003
Issuance of common stock																7		—		74		—			—			74
Exercise and issuance of employee stock options																31		—		497		—			—			497
Net income																—		—		—		6,376			—			6,376
Other comprehensive loss																—		—		—		—			(2,306	)		(2,306	)
Balance June 30, 2018																22,111	$	221	$	148,242	$	(17,556	)	$	(2,263	)	$	128,644

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AND ~~2016~~2017

(dollars in thousands)

	September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017
Operating activities:
Net income	$	7,843		$	7,196		$	6,376		$	5,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization		2,136			2,571			940			1,630
Stock-based compensation expense		559			426			464			373
Tax benefit of exercised stock options		(105	)		(50	)		(37	)		(94	)
Amortization of purchased loan premium		141			191			143			91
Provision for loan losses		150			450
Amortization of security premiums and accretion of discounts, net		1,331			1,307			850			833
Net gain on sale of securities		(180	)		(608	)		(14	)		(132	)
Net gain on sale and valuation of other real estate owned		(4	)		(315	)
Net gain on sale of loans								(53	)		—
Net loss on sale and valuation of other real estate owned								—			1
Originations of mortgages held for sale		—			(49,185	)		(872	)		—
Proceeds from sales of mortgages held for sale		—			51,286			872			—
Increase in bank owned life insurance investment		(572	)		(520	)		(368	)		(384	)
Changes in assets and liabilities:
(Increase) decrease in other assets		(1,526	)		334
Increase in other assets								(643	)		(1,220	)
Increase (decrease) in accrued expenses and other liabilities		400			(227	)		525			(313	)
Net cash provided by operating activities		10,173			12,856			8,183			6,212

Investing activities:
Proceeds from available for sale securities		47,313			96,320
Proceeds from held to maturity securities		660			10,402
Proceeds from equity securities, restricted		1,255			2,890
Proceeds from sales/calls/maturities/paydowns of available for sale securities								20,549			35,173
Proceeds from calls/maturities/paydowns of held to maturity securities								2,103			233
Proceeds from sales/calls/maturities/paydowns of restricted equity securities								465			1,035
Purchase of available for sale securities		(40,839	)		(43,494	)		(18,828	)		(30,191	)
Purchase of held to maturity securities		(643	)		(19,589	)		—			(643	)
Purchase of equity securities, restricted		(1,321	)		(3,756	)
Purchase of restricted equity securities								(105	)		(793	)
Proceeds from sale of other real estate owned		2,118			1,851			40			2,081
Improvements of other real estate, net of insurance proceeds		—			(34	)
Net increase in loans		(49,063	)		(59,519	)		(25,423	)		(24,602	)
Principal recoveries of loans previously charged off		380			272			324			291
Purchase of premises and equipment, net		(2,370	)		(1,573	)		(1,717	)		(2,228	)
Purchase small business investment company fund investment		(525	)		(262	)
Purchase of bank owned life insurance investment		—			(5,000	)
Proceeds from sale of premises and equipment		—			145
Purchase of small business investment company fund investment								(210	)		(262	)
Proceeds from sale of loans								3,812			—
Net cash used in investing activities		(43,035	)		(21,347	)		(18,990	)		(19,906	)

Financing activities:
Net increase in deposits		41,088			21,805			28,136			45,591
Net decrease in federal funds purchased		(4,714	)		(18,921	)		(4,849	)		(4,714	)
Net (decrease) increase in Federal Home Loan Bank borrowings		(591	)		13,426
Net decrease in short-term Federal Home Loan Bank borrowings								(5,000	)		(5,000	)
Payments on long-term Federal Home Loan Bank borrowings								(5,738	)		(393	)
Proceeds from issuance of common stock		227			116			107			210
Payments on long-term debt		(1,670	)		(2,937	)		—			(1,670	)
Net cash provided by financing activities		34,340			13,489			12,656			34,024

Net increase in cash and cash equivalents		1,478			4,998			1,849			20,330

Cash and cash equivalents:
Beginning of the period		21,072			16,969			21,958			21,072
End of the period	$	22,550		$	21,967		$	23,807		$	41,402

Supplemental disclosures of cash flow information:
Interest paid	$	6,638		$	5,787		$	5,294		$	4,315
Income taxes paid		3,320			3,444			1,169			2,470
Transfer of OREO property		397			947
Transfers of loans to other real estate owned								396			42
Transfers of building premises and equipment to held for sale								552			—

See accompanying notes to unaudited consolidated financial statements

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 2526 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 and larger commercial companies, 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.~~cash management services.

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 ~~September~~June 30, ~~2017,~~2018, the statements of income and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, and the statements of changes in shareholders’ equity and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Results for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 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. Such reclassifications had no impact on net income or shareholder’s equity.

Recent Accounting Pronouncements

In ~~March 2017,~~June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2017-08,~~2018-07,~~Receivables—Nonrefundable Fees~~Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees 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.

employees more similarly. The amendments are effective for ~~public business entities for annual periods~~fiscal years beginning after December 15, 2018, ~~including~~and interim periods within those ~~annual periods.~~fiscal years. Early adoption is permitted. ~~The Company is currently in compliance with this guidance; therefore, its adoption will have no impact on its financial statements.~~

~~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~~.

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~~ASU 2018-07 to have a material impact on its consolidated 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.

~~From 2014 to 2016, the FASB issued ASU 2014-09,~~~~Revenue from Contracts with Customers;~~~~ASU 2015-14,~~~~Deferral of the Effective Date;~~~~ASU 2016-08,~~~~Principal versus Agent Considerations;~~~~ASU 2016-10,~~~~Identifying Performance Obligations and Licensing;~~~~ASU 2016-12,~~~~Narrow-Scope Improvements and Practical Expedients; and~~~~ASU 2016-20,~~~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.~~~~These ASUs supersede the revenue recognition requirements in ASC Topic 605,~~~~Revenue Recognition~~, and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of the ASUs is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts, with remaining performance obligations as of the effective date. For public companies, the ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted beginning January 1, 2017.

The Company is evaluating the anticipated effects of these ASUs on its consolidated financial statements and related disclosures. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASUs are not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including interest income. The Company’s analysis indicates that service charges on deposit accounts and certain components within other noninterest income contain revenue streams that are in scope of these updates; however, the Company does not expect a material change in the timing or measurement of these revenues. The updates are expected to impact the presentation and disclosure related to these revenues. The Company will begin to analyze the underlying contracts, as applicable, related to these revenues to determine the ultimate impact of these updates. The Company plans to adopt the standards beginning January 1, 2018 and expects to use the modified retrospective method of adoption.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows(dollars in thousands):

	September 30, 2017									June 30, 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	$	46,919	$	26	$	(558	)	$	46,387	$	34,745	$	144	$	(550	)	$	34,339
U.S. Gov’t sponsored agencies		2,779		—		(36	)		2,743		9,077		77		(30	)		9,124
State, county and municipal		122,318		2,655		(644	)		124,329		120,935		780		(1,636	)		120,079
Corporate and other bonds		14,947		142		(67	)		15,022		8,539		174		(55	)		8,658
Mortgage backed – U.S. Gov’t agencies		5,659		47		(123	)		5,583		5,333		26		(224	)		5,135
Mortgage backed – U.S. Gov’t sponsored agencies		16,625		16		(258	)		16,383		22,479		6		(657	)		21,828
Total Securities Available for Sale	$	209,247	$	2,886	$	(1,686	)	$	210,447	$	201,108	$	1,207	$	(3,152	)	$	199,163

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies	$	10,000	$	—	$	(78	)	$	9,922	$	10,000	$	—	$	(287	)	$	9,713
State, county and municipal		35,965		974		(42	)		36,897		33,585		347		(140	)		33,792
Mortgage backed – U.S. Gov’t agencies		495		11		—			506		404		5		—			409
Total Securities Held to Maturity	$	46,460	$	985	$	(120	)	$	47,325	$	43,989	$	352	$	(427	)	$	43,914

December 31, 2016
Gross Unrealized
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
U.S. Gov’t  sponsored agencies 3,452 — (116 ) 3,336
State, county and municipal 121,686 2,247 (1,160 ) 122,773
Corporate and other bonds 15,936 — (433 ) 15,503
Mortgage backed – U.S. Gov’t agencies 3,614 — (119 ) 3,495
Mortgage backed – U.S. Gov’t sponsored agencies 13,330 21 (313 ) 13,038
Total Securities Available for Sale $ 216,742 $ 2,283 $ (2,904 ) $ 216,121

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 10,000 $ — $ (154 ) $ 9,846
State, county and municipal 35,847 568 (185 ) 36,230
Mortgage backed – U.S. Gov’t agencies 761 21 — 782
Total Securities Held to Maturity $ 46,608 $ 589 $ (339 ) $ 46,858
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 ~~September~~June 30, ~~2017~~2018 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 $ 3,202 $ 3,221 $ 3,684 $ 3,740 $ 2,661 $ 2,681 $ 9,183 $ 9,199
Due after one year through five years 24,804 25,034 97,802 98,829 23,700 23,454 89,195 88,914
Due after five years through ten years 12,779 13,204 98,364 98,427 13,399 13,545 96,976 95,387
Due after ten years 5,675 5,866 9,397 9,451 4,229 4,234 5,754 5,663
Total securities $ 46,460 $ 47,325 $ 209,247 $ 210,447 $ 43,989 $ 43,914 $ 201,108 $ 199,163

9
Proceeds from sales of securities available for sale were ~~$9.1~~$8.8 million and ~~$22.2~~$8.7 million during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$30.1~~$15.8 million and ~~$93.7~~$21.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 were as follows (dollars in thousands):

Three Months Ended Nine Months Ended Three months ended Six months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Gross realized gains $ 114 $ 191 $ 378 $ 1,223 $ 26 $ 134 $ 68 $ 264
Gross realized losses (66 ) (103 ) (198 ) (615 ) (42 ) (97 ) (54 ) (132 )
Net securities gains $ 48 $ 88 $ 180 $ 608
Net securities gains (losses) $ (16 ) $ 37 $ 14 $ 132

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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows (dollars in thousands):

September 30, 2017
Less than 12 Months 12 Months or More Total June 30, 2018
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Less than 12 Months 12 Months or More Total
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 $ 17,662 $ (225 ) $ 21,523 $ (333 ) $ 39,185 $ (558 ) $ 5,808 $ (51 ) $ 17,032 $ (499 ) $ 22,840 $ (550 )
U.S. Gov’t sponsored agencies - - 2,243 (36 ) 2,243 (36 ) - - 2,868 (30 ) 2,868 (30 )
State, county and municipal 18,753 (203 ) 8,252 (441 ) 27,005 (644 ) 48,387 (924 ) 12,171 (712 ) 60,558 (1,636 )
Corporate and other bonds - - 6,540 (67 ) 6,540 (67 ) 1,438 (19 ) 2,102 (36 ) 3,540 (55 )
Mortgage backed – U.S. Gov’t agencies 1,773 (23 ) 1,898 (100 ) 3,671 (123 ) 951 (23 ) 2,496 (201 ) 3,447 (224 )
Mortgage backed – U.S. Gov’t sponsored agencies 7,482 (99 ) 5,066 (159 ) 12,548 (258 ) 9,667 (212 ) 9,416 (445 ) 19,083 (657 )
Total $ 45,670 $ (550 ) $ 45,522 $ (1,136 ) $ 91,192 $ (1,686 ) $ 66,251 $ (1,229 ) $ 46,085 $ (1,923 ) $ 112,336 $ (3,152 )

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 9,922 $ (78 ) $ - $ - $ 9,922 $ (78 ) $ - $ - $ 9,713 $ (287 ) $ 9,713 $ (287 )
State, county and municipal 2,423 (12 ) 1,256 (30 ) 3,679 (42 ) 6,547 (108 ) 1,241 (32 ) 7,788 (140 )
Total $ 12,345 $ (90 ) $ 1,256 $ (30 ) $ 13,601 $ (120 ) $ 6,547 $ (108 ) $ 10,954 $ (319 ) $ 17,501 $ (427 )

December 31, 2016
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Less than 12 Months 12 Months or More Total
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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from ~~119~~192 securities at ~~September~~June 30, ~~2017.~~2018. Of those, ~~107~~185 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. ~~Twelve~~Four investment grade asset-backed securities comprised of student loan pools included in corporate obligations and ~~other bond obligations comprise~~three corporate bonds make up the remaining securities with unrealized losses at ~~September~~June 30, ~~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 ~~$65.6~~$57.9 million and ~~$75.8~~$71.7 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of ~~$3.9 million and $4.4~~$7.0 million at ~~September~~both June 30, ~~2017~~2018 and December 31, ~~2016, respectively,~~2017 were pledged to secure lines of credit at the Federal Reserve discount window. At each of ~~September~~June 30, ~~2017~~2018 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were comprised of the following (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 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 $ 229,745 25.82 % $ 207,863 24.86 % $ 217,610 22.50 % $ 227,542 24.16 %
Commercial 345,759 38.85 339,804 40.63 376,134 38.88 366,331 38.89
Construction and land development 102,594 11.53 98,282 11.75 119,110 12.31 107,814 11.44
Second mortgages 7,399 0.83 7,911 0.95 7,387 0.76 8,410 0.89
Multifamily 53,642 6.03 39,084 4.67 54,329 5.62 59,024 6.27
Agriculture 7,588 0.85 7,185 0.86 7,467 0.77 7,483 0.79
Total real estate loans 746,727 83.91 700,129 83.72 782,037 80.84 776,604 82.44
Commercial loans 136,643 15.35 129,300 15.46 170,065 17.58 159,024 16.88
Consumer installment loans 5,331 0.60 5,627 0.67 13,717 1.42 5,169 0.55
All other loans 1,279 0.14 1,243 0.15 1,542 0.16 1,221 0.13
Total loans $ 889,980 100.00 % $ 836,299 100.00 % $ 967,361 100.00 % $ 942,018 100.00 %

The Company held ~~$16.7~~$17.0 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 ~~September~~June 30, ~~2017~~2018 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 ~~$752,000~~$990,000 and ~~$749,000~~$824,000 at ~~September~~June 30, ~~2017~~2018 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company’s allowance for ~~credit~~loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ~~ASC~~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 ~~September~~June 30, ~~2017~~2018 (dollars in thousands):

Three months ended Nine months ended
September 30, 2017 September 30, 2017 September 30, 2017 Three months ended Six months ended
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized June 30, 2018 June 30, 2018 June 30, 2018
With no related allowance recorded: Recorded Investment⁽¹⁾ Unpaid Principal Balance⁽²⁾ Related Allowance Average Investment Interest Recognized Average Investment Interest Recognized
Mortgage loans on real estate:
Residential 1-4 family $ 1,929 $ 2,257 $ — $ 1,935 $ 7 $ 1,941 $ 21 $ 1,853 $ 2,227 $ — $ 1,863 $ 10 $ 1,876 $ 20
Commercial 3,905 4,510 — 3,802 39 4,582 114 3,578 4,225 — 3,702 38 3,755 75
Agriculture — — — 129 — 65 —
Construction and land development 388 388 — 403 — 268 —
Multifamily 2,559 2,559 — 1,279 31 853 61
Total real estate loans 5,834 6,767 — 5,866 46 6,588 135 8,378 9,399 — 7,247 79 6,752 156
Commercial loans 1,248 1,248 — 624 — 612 — 272 278 — 625 — 786 —
Subtotal impaired loans with no valuation allowance 7,082 8,015 — 6,490 46 7,200 135 8,650 9,677 — 7,872 79 7,538 156
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,379 2,831 307 2,373 20 2,426 59 2,193 2,605 291 2,223 19 2,221 39
Commercial 2,510 2,920 119 2,653 2 1,580 6 1,546 1,998 458 1,032 2 866 4
Construction and land development 4,283 5,542 456 4,290 — 4,595 — 4,796 6,061 610 4,966 — 4,737 —
Agriculture 66 68 8 33 — 16 — — — — 34 — 45 —
Total real estate loans 9,238 11,361 890 9,349 22 8,617 65 8,535 10,664 1,359 8,255 21 7,869 43
Commercial loans 1,640 1,923 72 1,570 1 869 3 245 246 31 247 1 273 2
Consumer installment loans 30 33 4 20 — 91 — — — — 2 — 3 —
Subtotal impaired loans with a valuation allowance 10,908 13,317 966 10,939 23 9,577 68 8,780 10,910 �� 1,390 8,504 22 8,145 45
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,308 5,088 307 4,308 27 4,367 80 4,046 4,832 291 4,086 29 4,097 59
Commercial 6,415 7,430 119 6,455 41 6,162 120 5,124 6,223 458 4,734 40 4,621 79
Construction and land development 4,283 5,542 456 4,290 — 4,595 — 5,184 6,449 610 5,369 — 5,005 —
Multifamily 2,559 2,559 — 1,279 31 853 61
Agriculture 66 68 8 162 — 81 — — — — 34 — 45 —
Total real estate loans 15,072 18,128 890 15,215 68 15,205 200 16,913 20,063 1,359 15,502 100 14,621 199
Commercial loans 2,888 3,171 72 2,194 1 1,481 3 517 524 31 872 1 1,059 2
Consumer installment loans 30 33 4 20 — 91 — — — — 2 — 3 —
Total impaired loans $ 17,990 $ 21,332 $ 966 $ 17,429 $ 69 $ 16,777 $ 203 $ 17,430 $ 20,587 $ 1,390 $ 16,376 $ 101 $ 15,683 $ 201

(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~~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~~allowances.

12
The following table summarizes information related to impaired loans as of December 31, ~~2016~~2017 and the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 (dollars in thousands):

Three months ended Nine months ended
December 31, 2016 September 30, 2016 September 30, 2016 Three months ended Six months ended
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized December 31, 2017 June 30, 2017 June 30, 2017
With no related allowance recorded: Recorded Investment⁽¹⁾ Unpaid Principal Balance⁽²⁾ Related Allowance Average Investment Interest Recognized Average Investment Interest Recognized
Mortgage loans on real estate:
Residential 1-4 family $ 1,704 $ 1,931 $ — $ 2,410 $ 5 $ 2,433 $ 13 $ 1,901 $ 2,246 $ — $ 2,065 $ 7 $ 1,945 $ 15
Commercial 6,570 7,078 — 4,198 39 4,247 117 3,862 4,477 — 3,927 38 4,808 76
Second mortgages — — — 135 — 68 —
Construction and land development — — — — — — —
Agriculture — — — 129 — 86 —
Total real estate loans 8,274 9,009 — 6,743 44 6,748 130 5,763 6,723 — 6,121 45 6,839 91
Commercial loans 1,200 1,200 — — — — — 1,108 1,108 — — — 400 —
Consumer installment loans — — — 122 — 123 — — — — — — — —
Subtotal impaired loans with no valuation allowance 9,474 10,209 — 6,865 44 6,871 130 6,871 7,831 — 6,121 45 7,239 91
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,621 3,062 283 2,825 15 3,113 46 2,216 2,640 290 2,352 20 2,441 39
Commercial 617 1,051 73 475 2 478 6 533 958 65 1,596 2 1,270 4
Construction and land development 5,495 6,746 730 5,694 — 5,098 — 4,277 5,537 556 4,300 — 4,699 —
Second mortgages — — — — — 40 —
Agriculture 68 71 8 — — — —
Total real estate loans 8,733 10,859 1,086 8,994 17 8,729 52 7,094 9,206 919 8,248 22 8,410 43
Commercial loans 53 53 7 54 — 40 — 325 446 39 892 1 612 2
Consumer installment loans 281 285 37 200 1 140 4 7 7 1 26 — 111 —
Subtotal impaired loans with a valuation allowance 9,067 11,197 1,130 9,248 18 8,909 56 7,426 9,659 959 9,166 23 9,133 45
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,325 4,993 283 5,235 20 5,546 59 4,117 4,886 290 4,417 27 4,386 54
Commercial 7,187 8,129 73 4,673 41 4,725 123 4,395 5,435 65 5,523 40 6,078 80
Construction and land development 5,495 6,746 730 5,694 — 5,098 — 4,277 5,537 556 4,300 — 4,699 —
Second mortgages — — — 135 — 108 —
Agriculture 68 71 8 129 — 86 —
Total real estate loans 17,007 19,868 1,086 15,737 61 15,477 182 12,857 15,929 919 14,369 67 15,249 134
Commercial loans 1,253 1,253 7 54 — 40 — 1,433 1,554 39 892 1 1,012 2
Consumer installment loans 281 285 37 322 1 263 4 7 7 1 26 — 111 —
Total impaired loans $ 18,541 $ 21,406 $ 1,130 $ 16,113 $ 62 $ 15,780 $ 186 $ 14,297 $ 17,490 $ 959 $ 15,287 $ 68 $ 16,372 $ 136

(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~~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~~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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, is set forth in the table below (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Nonaccruals $ 12,677 $ 10,243 $ 9,343 $ 9,026
Trouble debt restructure and still accruing 5,313 4,653 8,087 5,271
Substandard and still accruing — 3,645
Total impaired $ 17,990 $ 18,541 $ 17,430 $ 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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. For the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, estimated interest income of ~~$224,000~~$183,000 and ~~$198,000,~~$201,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, estimated interest income of ~~$550,000~~$322,000 and ~~$588,000,~~$345,000, 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017. The following tables present an age analysis of past due status of loans by category as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 June 30, 2018
30-89 Days
Past Due 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 $ 579 $ 2,140 $ 2,719 $ 227,026 $ 229,745 $ 1,104 $ 1,578 $ 2,682 $ 214,928 $ 217,610
Commercial — 3,492 3,492 342,267 345,759 87 2,274 2,361 373,773 376,134
Construction and land development — 4,283 4,283 98,311 102,594 65 5,184 5,249 113,861 119,110
Second mortgages — — — 7,399 7,399 — — — 7,387 7,387
Multifamily 2,545 — 2,545 51,097 53,642 2,559 — 2,559 51,770 54,329
Agriculture — 66 66 7,522 7,588 — — — 7,467 7,467
Total real estate loans 3,124 9,981 13,105 733,622 746,727 3,815 9,036 12,851 769,186 782,037
Commercial loans 603 2,666 3,269 133,374 136,643 — 307 307 169,758 170,065
Consumer installment loans 17 30 47 5,284 5,331 21 — 21 13,696 13,717
All other loans — — — 1,279 1,279 — — — 1,542 1,542
Total loans $ 3,744 $ 12,677 $ 16,421 $ 873,559 $ 889,980 $ 3,836 $ 9,343 $ 13,179 $ 954,182 $ 967,361

December 31, 2016 December 31, 2017
30-89 Days
Past Due 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 $ 296 $ 2,893 $ 3,189 $ 204,674 $ 207,863 $ 1,056 $ 1,962 $ 3,018 $ 224,524 $ 227,542
Commercial — 1,758 1,758 338,046 339,804 104 1,498 1,602 364,729 366,331
Construction and land development 54 5,495 5,549 92,733 98,282 — 4,277 4,277 103,537 107,814
Second mortgages — — — 7,911 7,911 — — — 8,410 8,410
Multifamily — — — 39,084 39,084 — — — 59,024 59,024
Agriculture — — — 7,185 7,185 19 68 87 7,396 7,483
Total real estate loans 350 10,146 10,496 689,633 700,129 1,179 7,805 8,984 767,620 776,604
Commercial loans — 53 53 129,247 129,300 48 1,214 1,262 157,762 159,024
Consumer installment loans 3 44 47 5,580 5,627 12 7 19 5,150 5,169
All other loans — — — 1,243 1,243 — — — 1,221 1,221
Total loans $ 353 $ 10,243 $ 10,596 $ 825,703 $ 836,299 $ 1,239 $ 9,026 $ 10,265 $ 931,753 $ 942,018

14
Activity in the allowance for loan losses on loans by segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 is presented in the following tables (dollars in thousands):

Three Months Ended September 30, 2017 Three Months Ended June 30, 2018
June 30, 2017 Provision
Allocation Charge-offs Recoveries September 30, 2017 March 31, 2018
Provision
Allocation
Charge-offs Recoveries June 30, 2018
Mortgage loans on real estate:
Residential 1-4 family $ 3,797 $ (444 ) $ (73 ) $ 15 $ 3,295 $ 3,115 $ 431 $ (53 ) $ 58 $ 3,551
Commercial 1,783 897 (457 ) 14 2,237 2,620 (438 ) — 7 2,189
Construction and land development 1,383 (78 ) (180 ) — 1,125 1,612 (218 ) — 35 1,429
Second mortgages 33 9 — 2 44 34 (3 ) — 1 32
Multifamily 167 566 — — 733 198 128 — — 326
Agriculture 21 (2 ) — — 19 33 (27 ) — — 6
Total real estate loans 7,184 948 (710 ) 31 7,453 7,612 (127 ) (53 ) 101 7,533
Commercial loans 1,457 (193 ) (265 ) 2 1,001 962 199 — 1 1,162
Consumer installment loans 111 26 (86 ) 56 107 112 (12 ) (67 ) 136 169
All other loans 9 (4 ) — — 5 10 (10 ) — 3 3
Unallocated 728 (627 ) — — 101 272 (50 ) — — 222
Total loans $ 9,489 $ 150 $ (1,061 ) $ 89 $ 8,667 $ 8,968 $ — $ (120 ) $ 241 $ 9,089

Three Months Ended September 30, 2016 Three Months Ended June 30, 2017
June 30, 2016 Provision
Allocation Charge-offs Recoveries September 30, 2016 March 31, 2017
Provision
Allocation
Charge-offs Recoveries June 30, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 2,445 $ 739 $ (202 ) $ 13 $ 2,995 $ 2,823 $ 927 $ (12 ) $ 59 $ 3,797
Commercial 3,572 (1,057 ) — 21 2,536 1,776 (11 ) — 18 1,783
Construction and land development 1,577 (154 ) (15 ) 1 1,409 1,547 (226 ) — 62 1,383
Second mortgages 46 (24 ) — 2 24 50 (19 ) — 2 33
Multifamily 293 297 — — 590 193 (26 ) — — 167
Agriculture 25 (9 ) — — 16 32 (11 ) — — 21
Total real estate loans 7,958 (208 ) (217 ) 37 7,570 6,421 634 (12 ) 141 7,184
Commercial loans 1,268 (392 ) — — 876 1,316 260 (120 ) 1 1,457
Consumer installment loans 102 38 (31 ) 7 116 133 12 (78 ) 44 111
All other loans 10 (3 ) — — 7 15 (6 ) — — 9
Unallocated 96 815 — — 911 1,628 (900 ) — — 728
Total loans $ 9,434 $ 250 $ (248 ) $ 44 $ 9,480 $ 9,513 $ — $ (210 ) $ 186 $ 9,489

Nine Months Ended September 30, 2017 Six Months Ended June 30, 2018
December 31, 2016 Provision
Allocation Charge-offs Recoveries September 30, 2017 December 31, 2017
Provision
Allocation
Charge-offs Recoveries June 30, 2018
Mortgage loans on real estate:
Residential 1-4 family $ 2,769 $ 545 $ (111 ) $ 92 $ 3,295 $ 3,466 $ 65 $ (53 ) $ 73 $ 3,551
Commercial 1,952 703 (457 ) 39 2,237 2,423 (254 ) — 20 2,189
Construction and land development 2,195 (939 ) (194 ) 63 1,125 1,247 146 — 36 1,429
Second mortgages 72 (79 ) — 51 44 24 6 — 2 32
Multifamily 260 473 — — 733 496 (170 ) — — 326
Agriculture 15 4 — — 19 14 (8 ) — — 6
Total real estate loans 7,263 707 (762 ) 245 7,453 7,670 (215 ) (53 ) 131 7,533
Commercial loans 602 779 (385 ) 5 1,001 1,139 47 (39 ) 15 1,162
Consumer installment loans 135 51 (209 ) 130 107 110 (4 ) (112 ) 175 169
All other loans 7 (2 ) — — 5 3 (3 ) — 3 3
Unallocated 1,486 (1,385 ) — — 101 47 175 — — 222
Total loans $ 9,493 $ 150 $ (1,356 ) $ 380 $ 8,667 $ 8,969 $ — $ (204 ) $ 324 $ 9,089

15
Nine Months Ended September 30, 2016
December 31, 2015 Provision
Allocation Charge-offs Recoveries September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family $ 2,884 $ 514 $ (527 ) $ 124 $ 2,995
Commercial 3,769 (1,171 ) (112 ) 50 2,536
Construction and land development 1,298 123 (15 ) 3 1,409
Second mortgages 96 (80 ) — 8 24
Multifamily 141 449 — — 590
Agriculture 24 (8 ) — — 16
Total real estate loans 8,212 (173 ) (654 ) 185 7,570
Commercial loans 631 234 — 11 876
Consumer installment loans 93 94 (147 ) 76 116
All other loans 25 (18 ) — — 7
Unallocated 598 313 — — 911
Total loans $ 9,559 $ 450 $ (801 ) $ 272 $ 9,480
Six Months Ended June 30, 2017
December 31, 2016
Provision
Allocation
Charge-offs Recoveries June 30, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 2,769 $ 989 $ (38 ) $ 77 $ 3,797
Commercial 1,952 (194 ) — 25 1,783
Construction and land development 2,195 (861 ) (14 ) 63 1,383
Second mortgages 72 (88 ) — 49 33
Multifamily 260 (93 ) — — 167
Agriculture 15 6 — — 21
Total real estate loans 7,263 (241 ) (52 ) 214 7,184
Commercial loans 602 972 (120 ) 3 1,457
Consumer installment loans 135 25 (123 ) 74 111
All other loans 7 2 — — 9
Unallocated 1,486 (758 ) — — 728
Total loans $ 9,493 $ — $ (295 ) $ 291 $ 9,489

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 June 30, 2018
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 $ 307 $ 2,988 $ 3,295 $ 4,308 $ 225,437 $ 229,745 $ 291 $ 3,260 $ 3,551 $ 4,046 $ 213,564 $ 217,610
Commercial 119 2,118 2,237 6,415 339,344 345,759 458 1,731 2,189 5,124 371,010 376,134
Construction and land development 456 669 1,125 4,283 98,311 102,594 610 819 1,429 5,184 113,926 119,110
Second mortgages — 44 44 — 7,399 7,399 — 32 32 — 7,387 7,387
Multifamily — 733 733 — 53,642 53,642 — 326 326 2,559 51,770 54,329
Agriculture 8 11 19 66 7,522 7,588 — 6 6 — 7,467 7,467
Total real estate loans 890 6,563 7,453 15,072 731,655 746,727 1,359 6,174 7,533 16,913 765,124 782,037
Commercial loans 72 929 1,001 2,888 133,755 136,643 31 1,131 1,162 517 169,548 170,065
Consumer installment loans 4 103 107 30 5,301 5,331 — 169 169 — 13,717 13,717
All other loans — 5 5 — 1,279 1,279 — 3 3 — 1,542 1,542
Unallocated — �� 101 101 — — — — 222 222 — — —
Total loans $ 966 $ 7,701 $ 8,667 $ 17,990 $ 871,990 $ 889,980 $ 1,390 $ 7,699 $ 9,089 $ 17,430 $ 949,931 $ 967,361
December 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 $ 290 $ 3,176 $ 3,466 $ 4,117 $ 223,425 $ 227,542
  Commercial 65 2,358 2,423 4,396 361,935 366,331
  Construction and land development 556 691 1,247 4,276 103,538 107,814
  Second mortgages — 24 24 — 8,410 8,410
  Multifamily — 496 496 — 59,024 59,024
  Agriculture 8 6 14 68 7,415 7,483
     Total real estate loans 919 6,751 7,670 12,857 763,747 776,604
Commercial loans 39 1,100 1,139 1,433 157,591 159,024
Consumer installment loans 1 109 110 7 5,162 5,169
All other loans — 3 3 — 1,221 1,221
Unallocated — 47 47 — — —
     Total loans $ 959 $ 8,010 $ 8,969 $ 14,297 $ 927,721 $ 942,018

16
December 31, 2016
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 $ 283 $ 2,486 $ 2,769 $ 4,325 $ 203,538 $ 207,863
Commercial 73 1,879 1,952 7,187 332,617 339,804
Construction and land development 730 1,465 2,195 5,495 92,787 98,282
Second mortgages — 72 72 — 7,911 7,911
Multifamily — 260 260 — 39,084 39,084
Agriculture — 15 15 — 7,185 7,185
Total real estate loans 1,086 6,177 7,263 17,007 683,122 700,129
Commercial loans 7 595 602 1,253 128,047 129,300
Consumer installment loans 37 98 135 281 5,346 5,627
All other loans — 7 7 — 1,243 1,243
Unallocated — 1,486 1,486 — — —
Total loans $ 1,130 $ 8,363 $ 9,493 $ 18,541 $ 817,758 $ 836,299

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 ~~$16.7~~$17.0 million and ~~$15.8~~$18.0 million at ~~September~~June 30, ~~2017~~2018 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.

The following tables present the composition of loans by credit quality indicator at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 June 30, 2018
Pass Special
Mention Substandard Doubtful Total Pass Special Mention Substandard Doubtful Total
Mortgage loans on real estate:
Residential 1-4 family $ 223,878 $ 3,638 $ 2,229 $ — $ 229,745 $ 212,594 $ 3,349 $ 1,667 $ — $ 217,610
Commercial 337,645 3,102 5,012 — 345,759 361,232 9,471 5,431 — 376,134
Construction and land development 98,132 179 4,283 — 102,594 113,722 204 5,184 — 119,110
Second mortgages 7,292 107 — — 7,399 7,181 206 — — 7,387
Multifamily 51,097 — 2,545 — 53,642 51,160 610 2,559 — 54,329
Agriculture 7,115 387 86 — 7,588 7,081 386 — — 7,467
Total real estate loans 725,159 7,413 14,155 — 746,727 752,970 14,226 14,841 — 782,037
Commercial loans 133,173 769 2,701 — 136,643 166,560 3,165 340 — 170,065
Consumer installment loans 5,283 18 30 — 5,331 13,708 9 — — 13,717
All other loans 1,279 — — — 1,279 1,542 — — — 1,542
Total loans $ 864,894 $ 8,200 $ 16,886 $ — $ 889,980 $ 934,780 $ 17,400 $ 15,181 $ — $ 967,361

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
17

In accordance with FASB ~~ASU~~Accounting 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 1721 loans that met the definition of a TDR ~~as of September~~at June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

During the three and six months ended ~~September~~June 30, 2018, the Company modified one multifamily loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $2.6 million.
During the three and six months ended June 30, 2017, the Company modified ~~two~~one residential 1-4 family ~~loans~~loan and one agriculture loan that were considered to be TDRs. The Company lowered the interest rate ~~and extended~~for the ~~term for each of the~~residential 1-4 family ~~loans,~~loan, which had a pre- and post-modification balance of ~~$354,000. During the nine months ended September 30, 2017, the Company modified three 1-4 family loans and one agriculture loan that were considered to be TDRs.~~$894,000. The Company extended the terms ~~for two of the 1-4 family loans and lowered the interest rate for each of these loans, which had a pre- and post-modification balance of $1.1 million. The Company extended the term~~ for the agriculture loan, which had a pre- and post-modification balance of $258,000.

The Company had no loan modifications considered to be TDRs during the three months ended September 30, 2016. During the nine months ended September 30, 2016, the Company modified one residential 1-4 family loan and one consumer installment loan that were considered to be TDRs. The Company extended the term for the residential 1-4 family loan, which had a pre- and post-modification balance of $81,000 and $97,000, respectively. The Company extended the term and lowered the interest rate for the consumer installment loan, which had a pre- and post-modification balance of $248,000.

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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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 ~~September~~June 30, ~~2017,~~2018, the Company had 1-4 family mortgages in the amount of ~~$147.4~~$129.7 million pledged to the Federal Home Loan Bank with a lendable collateral value of ~~$124.0~~$103.6 million.

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the outstanding contractual balance of the PCI loans was ~~$73.8~~$65.2 million and ~~$81.1~~$71.0 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 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 $ 40,746 89.65 % $ 46,623 89.72 % $ 35,900 89.95 % $ 39,805 89.79 %
Commercial 559 1.23 649 1.25 490 1.23 547 1.23
Construction and land development 1,599 3.52 1,969 3.79 1,499 3.76 1,588 3.58
Second mortgages 2,289 5.04 2,453 4.72 1,774 4.44 2,136 4.82
Multifamily 258 0.56 270 0.52 248 0.62 257 0.58
Total real estate loans 45,451 100.00 51,964 100.00 39,911 100.00 44,333 100.00
Total PCI loans $ 45,451 100.00 % $ 51,964 100.00 % $ 39,911 100.00 % $ 44,333 100.00 %

There was no activity in the allowance for loan losses on PCI loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.
18

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 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 $ 40,746 $ 200 $ 46,623 $ 200 $ 35,900 $ 200 $ 39,805
Commercial — 559 — 649 — 490 �� — 547
Construction and land development — 1,599 — 1,969 — 1,499 — 1,588
Second mortgages — 2,289 — 2,453 — 1,774 — 2,136
Multifamily — 258 — 270 — 248 — 257
Total real estate loans 200 45,451 200 51,964 200 39,911 200 44,333
Total PCI loans $ 200 $ 45,451 $ 200 $ 51,964 $ 200 $ 39,911 $ 200 $ 44,333

The change in the accretable yield balance for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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 (4,353 )
Reclassification from nonaccretable yield 339
Balance, September 30, 2017 $ 44,341
Balance, January 1, 2017 $ 48,355
Accretion (5,729 )
Reclassification from nonaccretable difference 1,500
Balance, December 31, 2017 $ 44,126
Accretion (2,670 )
Reclassification to nonaccretable difference (310 )
Balance, June 30, 2018 $ 41,146

The PCI loans were not classified as nonperforming assets as of ~~September~~June 30, ~~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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 December 31, 2016
June 30, 2018 December 31, 2017
Residential 1-4 family $ 383 $ 1,276 $ 882 $ 486
Commercial 15 643 15 15
Construction and land development 2,312 2,508 2,250 2,290
Total other real estate owned $ 2,710 $ 4,427 $ 3,147 $ 2,791

At ~~September~~June 30, ~~2017,~~2018, the Company had ~~$3.2 million~~$408,000 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 of September~~at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017

NOW $ 137,559 $ 137,332 $ 162,984 $ 157,037
MMDA 144,409 111,346 145,071 143,363
Savings 91,642 90,340 94,498 93,980
Time deposits less than or equal to $250,000 440,607 440,699 452,734 437,810
Time deposits over $250,000 118,837 128,690 116,657 110,546
Total interest bearing deposits $ 933,054 $ 908,407 $ 971,944 $ 942,736

21
19

Note 7. Accumulated Other Comprehensive (Loss) Income ~~(Loss)~~

The following tables present activity net of tax in accumulated other comprehensive (loss) income ~~(loss)~~ (AOCI) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

Three months ended September 30, 2017 Three months ended June 30, 2018
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss) Unrealized Gain (Loss) on Securities Defined Benefit Pension Plan Gain (Loss) on Cash Flow Hedge Total Other Comprehensive (Loss) Income

Beginning balance $ 769 $ (756 ) $ (25 ) $ (12 ) $ (1,009 ) $ (1,048 ) $ 283 $ (1,774 )
Other comprehensive income (loss) before reclassifications 43 - 35 78
Other comprehensive (loss) income before reclassifications (520 ) - 19 (501 )
Amounts reclassified from AOCI (31 ) - - (31 ) 12 - - 12
Net current period other comprehensive income (loss) 12 - 35 47
Net current period other comprehensive (loss) income (508 ) - 19 (489 )
Ending balance $ 781 $ (756 ) $ 10 $ 35 $ (1,517 ) $ (1,048 ) $ 302 $ (2,263 )

Three months ended September 30, 2016
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss)

Beginning balance $ 3,530 $ (901 ) $ (578 ) $ 2,051
Other comprehensive income (loss) before reclassifications (322 ) - 189 (133 )
Amounts reclassified from AOCI (58 ) - - (58 )
Net current period other comprehensive income (loss) (380 ) - 189 (191 )
Ending balance $ 3,150 $ (901 ) $ (389 ) $ 1,860

Nine months ended September 30, 2017 Three months ended June 30, 2017
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss) 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 ) $ 35 $ (767 ) $ 8 $ (724 )
Other comprehensive income (loss) before reclassifications 1,309 11 56 1,376 758 11 (33 ) 736
Amounts reclassified from AOCI (118 ) - - (118 ) (24 ) - - (24 )
Net current period other comprehensive income (loss) 1,191 11 56 1,258 734 11 (33 ) 712
Ending balance $ 781 $ (756 ) $ 10 $ 35 $ 769 $ (756 ) $ (25 ) $ (12 )

Nine months ended September 30, 2016 Six months ended June 30, 2018
Unrealized
Gain (Loss)
on Securities Defined
Benefit
Pension Plan Gain (Loss) on
Cash Flow
Hedge Total Other
Comprehensive
Income (Loss) 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 ) $ 954 $ (1,048 ) $ 137 $ 43
Other comprehensive income (loss) before reclassifications 3,109 - (258 ) 2,851
Other comprehensive (loss) income before reclassifications (2,460 ) - 165 (2,295 )
Amounts reclassified from AOCI (402 ) - - (402 ) (11 ) - - (11 )
Net current period other comprehensive income (loss) 2,707 - (258 ) 2,449
Net current period other comprehensive (loss) income (2,471 ) - 165 (2,306 )
Ending balance $ 3,150 $ (901 ) $ (389 ) $ 1,860 $ (1,517 ) $ (1,048 ) $ 302 $ (2,263 )
Six months ended June 30, 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 income (loss) before reclassifications 1,266 11 21 1,298
Amounts reclassified from AOCI (87 ) - - (87 )
Net current period other comprehensive income (loss) 1,179 11 21 1,211
Ending balance $ 769 $ (756 ) $ (25 ) $ (12 )

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The following ~~table presents~~tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Unaudited
Consolidated Statement of Income)
Three months ended
September 30, 2017 September 30, 2016
Securities available for sale:
Unrealized gains on securities available for sale $ (48 ) $ (88 ) Gain on securities transactions, net
Related tax expense 17 30 Income tax expense
$ (31 ) $ (58 ) Net of tax
Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Unaudited Consolidated Statement of Income
Three months ended
June 30, 2018 June 30, 2017
Securities available for sale:
Unrealized gain (loss) on securities available for sale $ 16 $ (37 ) Gain (loss) on securities transactions, net
Related tax expense (4 ) 13 Income tax expense
$ 12 $ (24 ) Net of tax

Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Unaudited
Consolidated Statement of Income Amount Reclassified from AOCI Affected Line Item in the Unaudited Consolidated Statement of Income
Nine months ended Six months ended
September 30, 2017 September 30, 2016 June 30, 2018 June 30, 2017
Securities available for sale:
Unrealized gains on securities available for sale $ (180 ) $ (608 ) Gain on securities transactions, net
Unrealized gain (loss) on securities available for sale $ (14 ) $ (132 ) Gain (loss) on securities transactions, net
Related tax expense 62 206 Income tax expense 3 45 Income tax expense
$ (118 ) $ (402 ) Net of tax $ (11 ) $ (87 ) 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.

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 ~~September~~June 30, ~~2017.~~2018.

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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~~the cash flow hedge 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):

September 30, 2017 June 30, 2018
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 46,387 $ 2,721 $ 43,666 $ - $ 34,339 $ - $ 34,339 $ -
U.S. Gov’t sponsored agencies 2,743 - 2,743 - 9,124 - 9,124 -
State, county and municipal 124,329 250 124,079 - 120,079 2,175 117,904 -
Corporate and other bonds 15,022 - 15,022 - 8,658 960 7,698 -
Mortgage backed – U.S. Gov’t agencies 5,583 - 5,583 - 5,135 - 5,135 -
Mortgage backed – U.S. Gov’t sponsored agencies 16,383 1,597 14,786 - 21,828 5,267 16,561 -
Total investment securities available for sale $ 210,447 $ 4,568 $ 205,879 $ - 199,163 8,402 190,761 -
Cash flow hedge 17 - 17 - 387 - 387 -
Total assets at fair value $ 210,464 $ 4,568 $ 205,896 $ - $ 199,550 $ 8,402 $ 191,148 $ -
Total liabilities at fair value $ - $ - $ - $ - $ - $ - $ - $ -

December 31, 2016 December 31, 2017
Total Level 1 Level 2 Level 3 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 $ - $ 40,256 $ - $ 40,256 $ -
U.S. Gov’t sponsored agencies 3,336 952 2,384 - 9,278 - 9,278 -
State, county and municipal 122,773 2,345 120,428 - 125,760 332 125,428 -
Corporate and other bonds 15,503 - 15,503 - 7,460 - 7,460 -
Mortgage backed – U.S. Gov’t agencies 3,495 - 3,495 - 5,442 - 5,442 -
Mortgage backed – U.S. Gov’t sponsored agencies 13,038 - 13,038 - 16,638 - 16,638 -
Total investment securities available for sale 216,121 14,352 201,769 - 204,834 332 204,502 -
Cash flow hedge 177 - 177 -
Total assets at fair value $ 216,121 $ 14,352 $ 201,769 $ - $ 205,011 $ 332 $ 204,679 $ -
Cash flow hedge $ (70 ) $ - $ (70 ) $ -
Total liabilities at fair value $ (70 ) $ - $ (70 ) $ - $ - $ - $ - $ -

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 June 30, 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).

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 typically 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.

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22

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

September 30, 2017 June 30, 2018
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Impaired loans $ 11,408 $ — $ 4,511 $ 6,897 $ 8,800 $ — $ 1,286 $ 7,514
Bank premises and equipment held for sale 552 — — 552
Other real estate owned 2,710 — 1,226 1,484 3,147 — 1,163 1,984
Total assets at fair value $ 14,118 $ — $ 5,737 $ 8,381 $ 12,499 $ — $ 2,449 $ 10,050
Total liabilities at fair value $ — $ — $ — $ — $ — $ — $ — $ —

December 31, 2016 December 31, 2017
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Impaired loans $ 9,536 $ — $ 2,168 $ 7,368 $ 7,915 $ — $ 1,306 $ 6,609
Other real estate owned 4,427 — 3,408 1,019 2,791 — 1,203 1,588
Total assets at fair value $ 13,963 $ — $ 5,576 $ 8,387 $ 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 ~~September~~June 30, ~~2017~~2018 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 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.

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.

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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 ~~measured as such~~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):

September 30, 2017 June 30, 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 $ 46,460 $ 47,325 $ — $ 47,325 $ — $ 43,989 $ 43,914 $ — $ 43,914 $ —
Loans, net of allowance 881,313 882,433 — 875,536 6,897 958,272 960,390 — — 960,390
PCI loans, net of allowance 45,251 52,219 — — 52,219 39,711 43,825 — — 43,825

Financial liabilities:
Interest bearing deposits 933,054 933,819 — 933,819 — 971,944 969,945 — 969,945 —
Long-term borrowings 85,420 85,343 — 85,343 —
Borrowings 94,815 94,407 — 94,407 —

December 31, 2016 December 31, 2017
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 $ — $ 46,146 $ 46,888 $ — $ 46,888 $ —
Loans, net of allowance 826,806 829,349 — 821,981 7,368 933,049 933,938 — 927,329 6,609
PCI loans, net of allowance 51,764 57,100 — — 57,100 44,133 48,655 — — 48,655

Financial liabilities:
Interest bearing deposits 908,407 909,627 — 909,627 — 942,736 943,037 — 943,037 —
Long-term borrowings 87,681 87,611 — 87,611 —
Borrowings 105,553 105,363 — 105,363 —

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 September 30, 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.
~~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).~~
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~~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.
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~~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.

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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars and shares in thousands, except per share data):

Net Income
(Numerator) Weighted Average
Common Shares
(Denominator) Per Common
Share Amount Net Income (Numerator) Weighted Average Common Shares (Denominator) Per Common Share Amount
For the three months ended September 30, 2017
For the three months ended June 30, 2018
Basic EPS $ 2,416 22,041 $ 0.11 $ 3,782 22,096 $ 0.17
Effect of dilutive stock awards — 501 — — 484 —
Diluted EPS $ 2,416 22,542 $ 0.11 $ 3,782 22,580 $ 0.17

For the three months ended September 30, 2016
For the three months ended June 30, 2017
Basic EPS $ 2,458 21,935 $ 0.11 $ 2,934 21,997 $ 0.13
Effect of dilutive stock awards — 192 — — 427 —
Diluted EPS $ 2,458 22,127 $ 0.11 $ 2,934 22,424 $ 0.13

For the nine months ended September 30, 2017
For the six months ended June 30, 2018
Basic EPS $ 7,843 22,000 $ 0.36 $ 6,376 22,086 $ 0.29
Effect of dilutive stock awards — 491 — — 465 (0.01 )
Diluted EPS $ 7,843 22,491 $ 0.35 $ 6,376 22,551 $ 0.28

For the nine months ended September 30, 2016
For the six months ended June 30, 2017
Basic EPS $ 7,196 21,902 $ 0.33 $ 5,427 21,979 $ 0.25
Effect of dilutive stock awards — 203 — — 461 (0.01 )
Diluted EPS $ 7,196 22,105 $ 0.33 $ 5,427 22,440 $ 0.24

There were no antidilutive exclusions from the computation of diluted earnings per common share for the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016.~~respectively.

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 included in salaries and employee benefits in the consolidated statement of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

Three months ended Nine months ended Three months ended Six months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Interest cost $ 39 $ 47 $ 117 $ 142 $ 39 $ 39 $ 79 $ 78
Expected return on plan assets (70 ) (81 ) (210 ) (244 ) (59 ) (70 ) (119 ) (140 )
Amortization of prior service cost 1 1 3 3 1 1 2 2
Recognized net loss due to settlement — 13 — 39 — — — —
Recognized net actuarial loss 12 91 36 163 15 12 30 24
Net periodic benefit cost $ (18 ) $ 71 $ (54 ) $ 103
Net periodic benefit income $ (4 ) $ (18 ) $ (8 ) $ (36 )

~~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. The net loss due to settlement to be amortized during 2016 was $52,000 at March 31, 2016, $234,000 at June 30, 2016, and $253,000 at September 30, 2016.
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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 ~~September~~June 30, ~~2017~~2018 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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. The fair value of the Company’s cash flow hedge was an unrealized gain of ~~$17,000~~$387,000 and $177,000 at ~~September~~June 30, 2018 and December 31, 2017, respectively, and was recorded in other assets. The ~~fair value of the Company’s cash flow hedge~~gain was ~~an unrealized loss of $70,000 at December 31, 2016, and was recorded in other liabilities. The gain and loss were~~ recorded as a component of other comprehensive (loss) income net of associated tax effects.

Note 12. Revenue Recognition
On January 1, 2018, the Company adopted FASB 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.
Interchange and ATM 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.
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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 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 and six months ended June 30, 2018 and 2017 (dollars in thousands):
Three months ended Six months ended
June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Noninterest income
In-scope of Topic 606:
Service charges of deposit accounts $ 390 $ 384 $ 781 $ 754
Interchange and ATM fees 221 197 411 352
Brokerage fee and commissions 135 60 196 140
Noninterest income (in-scope of Topic 606) 746 641 1,388 1,246
Noninterest income (out-of-scope of Topic 606) 389 396 780 784
Total noninterest income $ 1,135 $ 1,037 $ 2,168 $ 2,030
Note 13. Branch Closing
The Company closed its Prince Street branch located in Tappahannock, 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 $552,000 reflects the lower of cost or fair market value at June 30, 2018 and has been classified as held for sale on the consolidated balance sheet.

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

The following discussion and analysis of the financial condition at ~~September~~June 30, ~~2017~~2018 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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 2526 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 and larger commercial companies, 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.~~cash management services.
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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 mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through branch growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning 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~~
The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions ~~mortgage loan income~~ and income from ~~Bank Owned Life Insurance~~bank 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, data processing expenses, 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;

· 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;
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· 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, ~~2016~~2017 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.
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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.

· 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 collateral value (or 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.
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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal 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~~Financial Accounting Standards Board (FASB) Accounting Standards Codification (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.

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.
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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 such interest or penalties during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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~~subsidiaryare subject to ~~U. S.~~U.S. federal income tax as well as Virginia and Maryland state income tax. All years from ~~2013~~2014 through ~~2016~~2017 are open to examination by the respective tax authorities.

RESULTS OF OPERATIONS

Overview

Net income ~~was $2.4~~of $3.8 million for the ~~third~~second quarter of 2018 was an increase of $848,000, or 28.9%, over second quarter 2017 ~~compared with~~ net income of ~~$2.5~~$2.9 million. Pre-tax net income increased $969,000, or 26.7%, in the second quarter of 2018. Interest and dividend income increased by $1.3 million in the ~~third~~second quarter of ~~2016. Earnings per common share, basic~~2018 compared with the same period in 2017, driven by interest and ~~fully diluted, were $0.11 per share for each of~~fees on loans, which increased $1.4 million. Noninterest income increased by $98,000 year-over-year, and noninterest expenses declined by $198,000. Offsetting these increases was an increase in income tax expense, which was $121,000 greater, year-over-year, based on the ~~three months ended September 30, 2017 and 2016.~~increase in pre-tax income but lessened by the reduction in the corporate tax rate, from 34% to 21%.

Net income was ~~$7.8~~$6.4 million for the ~~nine~~first six months ~~ended September 30, 2017 versus net income~~ of ~~$7.2~~2018 compared with $5.4 million for the same period in ~~2016. Basic~~2017. This is an increase of $949,000, or 17.5%. Increases were in interest and dividend income, which increased by $2.4 million, or 9.3%, and in noninterest income, which increased by $138,000, or 6.8%. Also positively affecting earnings ~~per common share~~was a reduction of $415,000 in income tax expense. Offsetting these increases to net income were ~~$0.36 per share~~an increase of $1.2 million in interest expense and ~~$0.33 per share~~an increase of $877,000 in noninterest expense. Comparing pre-tax income for the ~~nine months ended September 30, 2017~~two periods eliminates most of the effect of the Tax Cuts and ~~2016, respectively. Fully diluted earnings per common share were $0.35 per share and $0.33 per share~~Jobs Act of 2017. Income before taxes increased by $534,000, or 7.4%, for the ~~nine~~first six months ~~ended September 30, 2017 and 2016, respectively.~~of 2018 compared with the same period in 2017.

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.”

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Net interest income increased ~~$523,000,~~$673,000, or ~~5.0%~~6.1%, from the ~~third quarter of 2016 to the third~~second quarter of 2017 ~~and~~to the second quarter of 2018. Net interest income was $11.6 million in the second quarter of 2018 compared with $11.0 ~~million.~~million for the same period in 2017. Interest income increased $1.3 million, or 9.8%, over this time period. The increase in interest income was generated by an increase of $69.5 million, or 5.8%, in the level of earning assets. The yield on earning assets ~~of 4.51%~~increased from 4.53% in the ~~third~~second quarter of 2017 ~~was a slight increase from 4.50%~~to 4.64% in the ~~third~~second quarter of ~~2016. Yield on~~2018. The average balance of loans, excluding PCI loans, increased ~~from 4.54% to 4.62%, and volume considerations increased the average balance by $68.5~~$98.6 million, or ~~8.5%.~~11.5%, from $860.4 million in the second quarter of 2017 to $959.0 million in the second quarter of 2018. Interest income on ~~loans~~securities was ~~$10.1~~$1.8 million ~~an increase~~in each of ~~$971,000 over third~~the second quarter ~~2016 interest income~~ of ~~$9.2 million.~~ 2018 and second quarter of 2017. On a tax-equivalent basis, the yield on investment securities was 3.11% in the second quarter of 2018, based on a 21% tax rate, and 3.09% in the second quarter of 2017, based on a 34% tax rate.
Interest on PCI loans was ~~$1.4~~$1.3 million in the ~~third~~second quarter of ~~2017, a decrease of $126,000 year over year. The return on PCI loans increased over this time frame, from 11.32% to 11.76%. Income on securities of $1.8~~2018 compared with $1.5 million in the ~~third~~second quarter of ~~2017 represented an increase of $93,000 year over year as a result of an increase of $15.2 million in the~~2017. The average balance of ~~securities. The tax-equivalent yield on securities was 3.10% in~~ the ~~third quarter of each of 2017 and 2016.~~PCI portfolio declined $8.1 million during the year-over-year comparison period.

Interest expense increased ~~$459,000,~~$617,000, or ~~24.1%~~27.5%, when comparing the ~~third~~second quarter of 2017 and the ~~third~~second quarter of ~~2016.~~2018. Interest expense on deposits increased ~~$503,000,~~$411,000, or ~~32.5%~~21.1%, as the average balance of interest bearing deposits increased ~~$103.4~~$24.6 million, or ~~12.4%~~2.6%. The increase in deposit cost was driven by an increase in NOW and MMDA average balances, which increased a combined $60.1 million year-over-year. Likewise, the cost of these balances increased $174,000, from 0.26% to 0.44%, over the same time frame. Higher cost time deposit average balances declined over the comparison period by $37.9 million; however, expense on this category increased by $236,000, resulting in an increase in cost from 1.16% to 1.41%. FHLB and other borrowings increased, on average, $18.4 million year-over-year, and there was an increase in the rate paid, from 1.42% in the second quarter of 2017 to 1.87% in the second quarter of 2018. This resulted in an increase in the expense of this wholesale funding source of $182,000, to $482,000 in the second quarter of 2018. The average balance of FHLB and other borrowings was $103.2 million in the second quarter of 2018. Overall, the Bank’s cost of interest bearing liabilities increased 19 basis points, from ~~0.79%~~0.89% in the ~~third quarter of 2016 to 0.92% in the third quarter of 2017. While average interest bearing deposit costs increased from 0.74% in the third quarter of 2016 to 0.87% in the third~~second quarter of 2017 ~~there was a decline of $34.1 million~~to 1.08% in the average balance of FHLB advances, other borrowings and long-term debt. Management is shifting from wholesale funding sources to retail deposits. The cost of FHLB advances for the Bank increased from 1.05% in the thirdsecond quarter of ~~2016 to 1.57% in the third quarter of 2017. The lower average balance of FHLB advances, coupled with the higher rate, resulted in a $13,000 increase in interest expense, year-over-year.~~2018.

The ~~tax equivalent~~tax-equivalent net interest margin decreased 8five basis points, from ~~3.82%~~3.78% in the ~~third~~second quarter of ~~2016~~2017 to ~~3.74%~~3.73% in the ~~third~~second quarter of ~~2017.~~2018. Likewise, the interest spread decreased from ~~3.71%~~3.64% to ~~3.59%~~3.56% over the same time period. The decrease in the margin was precipitated by anthe increase ~~of 16.5%~~ in the cost of interest bearing ~~labilities.~~liabilities without a corresponding increase in the yield on earning assets.

For the first ~~nine months~~half of ~~2017,~~2018, net interest income increased ~~$2.0~~$1.3 million, or ~~6.5%~~5.8%, and was ~~$32.9~~$23.1 million. The ~~tax-equivalent~~ yield on earning assets was ~~4.55%~~4.62% compared with 4.57% for the first ~~nine~~six months of ~~2017 compared with 4.52% for the first nine months of 2016.~~2017. Interest and fees on loans of ~~$29.7~~$22.2 million in the first two quarters of 2018 was an increase of ~~$3.1~~$2.7 million compared with ~~$26.6~~$19.5 million for the same period in ~~2016.~~2017. Interest and fees on PCI loans declined ~~$349,000~~$260,000 over this same time frame. Securities income ~~increased $156,000~~decreased $31,000 for the first ~~nine~~six months of ~~2017~~2018 compared with the same period in ~~2016.~~2017. On a tax-equivalent basis, income on securities decreased $352,000, primarily the result of less benefit on bank qualified municipal securities from the implementation in December 2017 of the Tax Cuts and Jobs Act. The tax-equivalent yield on the ~~securities~~ portfolio was ~~3.14%~~3.04% for the first ~~nine months~~two quarters of ~~2017 compared with 3.11%~~2018, based on a 21% tax rate, and 3.15% for the same ~~time frame~~period in ~~2016.~~2017, based on a 34% tax rate.

Interest expense of ~~$6.7~~$5.5 million represented an increase of ~~$961,000, or 16.8%,~~$1.1 million in the first ~~nine~~six months of ~~2017~~2018 compared with the same period in ~~2016. Total average~~2017. Average interest bearing liabilities increased ~~6.2%,~~$52.2 million, or ~~$58.7 million,~~5.2%, as loan growth ~~has also been funded~~was fueled by an average balance increase of ~~$21.1~~$61.3 million, or ~~18.9%~~25.5%, in the combination of NOW and MMDA accounts. This has allowed more expensive time deposit balances to decrease, on average, by $30.2 million, or 5.1%, resulting in a $32.9 million increase in the average balance ~~noninterest bearing~~of total deposits.

The tax equivalent net interest margin ~~was 3.80%~~declined from 3.83% for the first ~~nine~~six months of 2017 ~~compared with 3.82%~~to 3.75% for the first ~~nine~~six months of ~~2016.~~2018. While the yield on earning assets increased by five basis points over this time frame, the competition for funding has pushed the cost of interest bearing liabilities up, from 0.87% to 1.04%. The net interest spread was ~~3.66%~~3.58% for the first ~~nine~~six months of ~~2017~~2018 versus ~~3.72%~~3.70% for the first ~~nine~~six months of ~~2016.~~2017.

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The following tables set 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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. The ~~table~~tables also ~~sets~~set 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.

~~NET INTEREST MARGIN ANALYSIS~~
~~AVERAGE BALANCE SHEETS~~
~~(Dollars in thousands)~~
(dollars in thousands) Three months ended June 30, 2018 Three months ended June 30, 2017
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans, including fees $ 958,955 $ 11,353 4.75 % $ 860,393 $ 9,952 4.64 %
PCI loans, including fees 41,157 1,274 12.24 49,253 1,453 11.80
Total loans 1,000,112 12,627 5.06 909,646 11,405 5.03
Interest bearing bank balances 14,819 69 1.85 19,225 52 1.10
Federal funds sold 87 1 1.82 137 - 1.04
Securities (taxable) 174,781 1,266 2.90 182,227 1,157 2.54
Securities (tax exempt)⁽¹⁾ 76,864 693 3.61 85,972 918 4.27
Total earning assets 1,266,663 14,656 4.64 1,197,207 13,532 4.53
Allowance for loan losses (9,271 ) (9,697 )
Non-earning assets 92,502 89,222
Total assets $ 1,349,894 $ 1,276,732

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 301,515 328 0.44 $ 241,376 154 0.26
Savings 94,096 61 0.26 91,723 60 0.26
Time deposits 561,056 1,966 1.41 598,965 1,730 1.16
Total interest bearing deposits 956,667 2,355 0.99 932,064 1,944 0.84
Short-term borrowings 4,771 26 2.20 517 2 1.37
FHLB and other borrowings 103,188 482 1.87 84,761 300 1.42
Total interest bearing liabilities 1,064,626 2,863 1.08 1,017,342 2,246 0.89
Noninterest bearing deposits 152,498 133,320
Other liabilities 5,909 5,654
Total liabilities 1,223,033 1,156,316
Shareholders' equity 126,861 120,416

Total liabilities and shareholders' equity $ 1,349,894 $ 1,276,732
Net interest earnings $ 11,793 $ 11,286
Interest spread 3.56 % 3.64 %
Net interest margin 3.73 % 3.78 %

Tax equivalent adjustment:
Securities $ 146 $ 312

Three months ended September 30, 2017 Three months ended September 30, 2016
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 869,501 $ 10,127 4.62 % $ 801,017 $ 9,156 4.54 %
Purchased credit impaired (PCI) loans 47,358 1,423 11.76 54,301 1,549 11.32
Total loans 916,859 11,550 5.00 855,318 10,705 4.97
Interest bearing bank balances 18,333 65 1.40 9,876 22 0.88
Federal funds sold 105 1 1.21 14 - 0.50
Securities (taxable) 182,703 1,171 2.56 172,591 1,133 2.63
Securities (tax exempt)⁽¹⁾ 86,106 912 4.24 81,007 829 4.09
Total earning assets 1,204,106 13,699 4.51 1,118,806 12,689 4.50
Allowance for loan losses (9,523 ) (9,861 )
Non-earning assets 89,935 87,419
Total assets $ 1,284,518 $ 1,196,364

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 280,253 284 0.40 $ 234,828 156 0.26
Savings 90,774 60 0.26 86,327 58 0.27
Time deposits 567,800 1,709 1.19 514,312 1,336 1.03
Total deposits 938,827 2,053 0.87 835,467 1,550 0.74
Short-term borrowings 381 2 1.67 2,731 6 0.93
FHLB and other borrowings 77,617 308 1.57 111,757 295 1.05
Long-term debt - - - 3,795 53 5.50
Total interest bearing liabilities 1,016,825 2,363 0.92 953,750 1,904 0.79
Noninterest bearing deposits 138,330 122,571
Other liabilities 5,395 5,753
Total liabilities 1,160,550 1,082,074
Shareholders' equity 123,968 114,290

Total liabilities and shareholders' equity $ 1,284,518 $ 1,196,364
Net interest earnings $ 11,336 $ 10,785
Interest spread 3.59 % 3.71 %
Net interest margin 3.74 % 3.82 %

Tax equivalent adjustment:
Securities $ 310 $ 282
(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21% for 2018 and 34% for 2017.

~~(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.~~
37
34

~~NET INTEREST MARGIN ANALYSIS~~
~~AVERAGE BALANCE SHEETS~~
~~(Dollars in thousands)~~
Nine months ended September 30, 2017 Nine months ended September 30, 2016
(dollars in thousands) Six months ended June 30, 2018 Six months ended June 30, 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 $ 856,465 $ 29,676 4.63 % $ 776,491 $ 26,582 4.56 % $ 951,201 $ 22,229 4.71 % $ 849,839 $ 19,549 4.64 %
Purchased credit impaired (PCI) loans 49,117 4,355 11.69 55,974 4,704 11.20 42,257 2,672 12.58 50,011 2,932 11.66
Total loans 905,582 34,031 5.02 832,465 31,286 5.01 993,458 24,901 5.05 899,850 22,481 5.04
Interest bearing bank balances 15,597 143 1.22 11,065 66 0.80 11,955 109 1.83 14,207 78 1.11
Federal funds sold 97 1 1.08 5 - 0.50 72 1 1.71 93 - 1.00
Securities (taxable) 182,724 3,577 2.61 178,700 3,528 2.63 175,667 2,452 2.79 182,734 2,406 2.63
Securities (tax exempt)⁽¹⁾ 85,607 2,735 4.26 82,750 2,573 4.15 79,091 1,424 3.60 85,353 1,822 4.27
Total earning assets 1,189,607 40,487 4.55 1,104,985 37,453 4.52 1,260,243 28,887 4.62 1,182,237 26,787 4.57
Allowance for loan losses (9,647 ) (9,985 ) (9,224 ) (9,709 )
Non-earning assets 89,261 84,712 90,567 88,919
Total assets $ 1,269,221 $ 1,179,712 $ 1,341,586 $ 1,261,447

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 253,638 579 0.31 $ 233,186 481 0.27 $ 301,415 659 0.44 $ 240,110 295 0.25
Savings 91,473 181 0.27 84,661 176 0.28 93,604 121 0.26 91,829 121 0.27
Time deposits 580,346 5,016 1.16 520,306 3,981 1.02 556,546 3,718 1.35 586,722 3,307 1.14
Total deposits 925,457 5,776 0.83 838,153 4,638 0.74 951,565 4,498 0.95 918,661 3,723 0.82
Short-term borrowings 994 9 1.21 2,313 14 0.85 3,563 37 2.12 1,306 7 1.14
FHLB and other borrowings 84,072 905 1.44 106,571 903 1.13 104,354 940 1.79 87,354 597 1.38
Long-term debt - - - 4,771 174 4.80
Total interest bearing liabilities 1,010,523 6,690 0.89 951,808 5,729 0.80 1,059,482 5,475 1.04 1,007,321 4,327 0.87
Noninterest bearing deposits 132,868 111,751 150,446 130,091
Other liabilities 5,487 5,297 5,731 5,534
Total liabilities 1,148,878 1,068,856 1,215,659 1,142,946
Shareholders' equity 120,343 110,856 125,927 118,501

Total liabilities and shareholders' equity $ 1,269,221 $ 1,179,712 $ 1,341,586 $ 1,261,447
Net interest earnings $ 33,797 $ 31,724 $ 23,412 $ 22,460
Interest spread 3.66 % 3.72 % 3.58 % 3.70 %
Net interest margin 3.80 % 3.82 % 3.75 % 3.83 %

Tax equivalent adjustment:
Securities $ 930 $ 875 $ 299 $ 619

~~(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.~~
38
(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 recorded a $150,000~~
35
There was no provision for loan losses on the loan portfolio, excluding PCI loans, during either of the three and ~~nine~~six months ended ~~September~~June 30, 2018 and 2017. The absence of a provision in the first and second quarters of 2018 was the direct result of nominal charge-offs and stable asset quality. There was no provision for loan losses on the PCI loan portfolio during either of the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and 2016. The Company recorded a provision for loan losses in the amount of $250,000 and $450,000 for the three and nine months ended September 30, 2016. The $150,000 provision for loan losses in the third quarter of 2017 was to provide the required level of reserve needed when considering the existing loan portfolio and recent charge-off activity of $972,000 and to support loan growth during the quarter. The provision for loan losses booked for the three and nine months ended September 30, 2016 supported general reserves following loan growth of $63.1 million during the year.2017. Additional discussion of loan quality is presented below.

There were net ~~charge-offs~~recoveries of ~~$972,000~~$121,000 in the ~~third~~second quarter of ~~2017,~~2018, compared with net charge-offs of ~~$204,000~~$24,000 in the ~~third~~second quarter of ~~2016.~~2017. Total charge-offs were ~~$1.1 million~~$120,000 for the ~~third~~second quarter of ~~2017~~2018 compared with ~~$248,000~~$210,000 in the ~~third~~second quarter of ~~2016.~~2017. Recoveries of previously charged-off loans were ~~$89,000~~$241,000 for the ~~third~~second quarter of ~~2017~~2018 compared with ~~$44,000~~$186,000 in the ~~third~~second quarter of ~~2016.~~2017.

There were net ~~charge-offs~~recoveries of ~~$976,000~~$120,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, compared with net charge-offs of ~~$529,000~~$4,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. Total charge-offs were ~~$1.4 million~~$204,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared with ~~$801,000~~$295,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. Recoveries of previously charged-off loans were ~~$380,000~~$324,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared with ~~$272,000~~$291,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

Noninterest Income

Noninterest income ~~decreased $180,000,~~increased $98,000, or ~~13.4%~~9.5%, ~~from~~and was $1.1 million in the ~~third~~second quarter of ~~2016~~2018. Other noninterest income, as a result of improved commission income, increased $68,000 year over year, and service charges increased $29,000. Gain on sale of loans was $53,000 in the second quarter of 2018 versus $0 in the second quarter of 2017. Offsetting these increases to noninterest income was a decrease of $53,000 in gain on securities transactions, when a gain of $37,000 was reported in the ~~third~~second quarter of 2017 compared with a loss of $16,000 in the second quarter of 2018.
Noninterest income was $2.2 million for the first six months of 2018, an increase of $138,000, or 6.8%, compared with $2.0 million for the first six months of 2017. Mortgage loan income ~~decreased $193,000. Gains on securities transactions were $48,000 in~~of $191,000 for the ~~third quarter~~first six months of ~~2017, as compared with $88,000 in the third quarter of 2016, a decrease of $40,000. Offsetting these decreases~~2018 was an increase of ~~$61,000 in service charge income.~~
Noninterest income was $3.5 million for the first nine months of 2017 compared with $4.1 million for the first nine months of 2016, a decrease of $555,000, or 13.7%. Mortgage loan income decreased $436,000,$87,000 from ~~$599,000 in the first nine months of 2016 to $163,000~~$104,000 for the same period in 2017. ~~The Company discontinued a wholesale mortgage operation at the end of the third quarter of 2016~~Service charges and shifted to a platform that requires lower overhead but has equivalent or better net revenue potential. Securities gains of $180,000 in the first three quarters of 2017 compared with $608,000 for the same period in 2016. Securities were sold during 2016 to fund a portion of the Bank’s loan growth, while in 2017 much of the loan growth has been funded with deposit balance growth. Offsetting these decreasesfees accounts increased $85,000 for the first ~~nine~~six months of ~~2017~~2018 compared with the same period in ~~2016~~2017 and were $1.2 million. Gain on sale of loans was $53,000 for the first six months of 2018 versus $0 for the same period in 2017. Other noninterest income, driven by higher commission income, reflected an increase of $48,000 for the first six months of 2018 over the same period in 2017. Partially offsetting these increases was a decline of ~~$226,000~~$118,000 in ~~service charges~~gains on ~~deposit accounts, $74,000 in income on bank owned life insurance and $9,000 in other noninterest income.~~securities transactions.

Noninterest Expense

Noninterest expenses ~~increased $428,000,~~decreased $198,000, or ~~5.2%~~2.4%, when comparing the ~~third~~second quarter of ~~2017~~2018 to the same period in ~~2016. Other~~2017. Amortization of intangibles decreased $339,000 year over year, and other operating expenses ~~increased $325,000.~~decreased by $215,000. Within the decrease of $215,000 in other operating expenses were declines of $113,000 in telephone and internet line, $64,000 in stationery, printing and supplies, $56,000 in marketing expense and $55,000 in credit expense. Offsetting these decreases to noninterest expenses were increases of $176,000 in salaries and employee benefits, $84,000 in equipment expenses, $34,000 in FDIC assessment, $29,000 in occupancy expenses, $22,000 in data processing fees and $11,000 in other real estate expenses mainly attributed to branch expansion activities that added three new offices during 2017.
Noninterest expenses were $17.6 million for the first six months of 2018, as compared with $16.7 million for the same period in 2017. This is an increase of $877,000, or 5.3%. Salaries and employee benefits increased ~~$322,000, occupancy expenses increased $101,000, and data processing expenses increased $91,000. Offsetting these increases was a decrease year-over-year~~$1.4 million for the first six months of ~~$415,000 in amortization of intangibles. The Bank has opened two new branches since the end of the 2016 comparison period. While the increases in noninterest expenses in the third quarter of 2017~~2018 compared with the same period in ~~2016 are primarily a reflection of the branch expansion activity that has occurred~~2017. Within this increase, $723,000 was related to group hospital and medical insurance increases and $525,000 were related to increases in ~~2016 and 2017, credit~~total salaries. Also impacting noninterest expenses ~~also increased $190,000 year over year.~~
~~Noninterest expenses were $25.7 million~~ for the first ~~nine~~six months of 2017, as compared with $24.5 million for the same period in 2016. This is an increase of $1.2 million, or 4.7%. Salaries and employee benefits increased $718,000, or 5.2%, in the first nine months of 20172018 compared with the same period in 2016. Other operating expenses increased $366,000 over the comparison period. Occupancy expenses increased $286,000, data processing fees increased $236,000, other real estate expenses increased $187,000 and2017 were increases of $114,000 in equipment expenses ~~increased $120,000. Offsetting these~~and $109,000 in occupancy expenses due to the branch expansion activities noted above. These increases were ~~decreases~~offset by a decline of $816,000 in amortization of intangibles, which declined $552,000, and FDIC assessment, which declined $206,000. The increases in noninterest expenses in the first nine months of 2017 compared with the same period in 2016 are primarily a reflection of the branch expansion activity that has occurred in 2016 and 2017. The Bank has opened four new branches over the course of 2016 and 2017. Credit expenses also increased $137,000 from the first nine months of 2016 to the same periodbecame fully amortized in 2017.
Income Taxes

Income tax expense was ~~$919,000~~$813,000 for the three months ended ~~September~~June 30, ~~2017~~2018, compared with an income tax expense of ~~$862,000~~$692,000 for the ~~third~~second quarter of ~~2016.~~2017. For the six months ended June 30, 2018, income tax expense was $1.4 million compared with $1.8 million for the first six months of 2017. The effective tax rate ~~was 27.6%~~ for the ~~third~~second quarter of ~~2017 compared with 26.0% for~~2018 was 17.7% versus 19.1% in the ~~third~~second quarter of ~~2016~~.2017. For the ~~nine~~first six months ~~ended September 30, 2017, income tax expense~~ of ~~$2.7 million represented an~~2018, the effective tax rate ~~of 25.5%. For~~was 17.5% and for the ~~nine months ended September 30, 2016, income tax expense~~same period in 2017 it was ~~$2.7 million, or an effective rate of 27.5%~~24.6%. The ~~lower~~decrease in the Company’s effective tax rate resulted principally from the decrease in ~~2017 was primarily the~~its applicable federal corporate tax rate from 34% to 21% as a result of the ~~exercise of stock options by employees, which reduced income tax expense, as required by a recently adopted GAAP standard.~~Tax Cuts and Jobs Act enacted in December 2017.
36
FINANCIAL CONDITION

General

Total assets increased ~~$44.3~~$17.7 million, or ~~3.5%~~1.3%, to ~~$1.294~~$1.354 billion at ~~September~~June 30, ~~2017 as~~2018 when compared with ~~$1.250 billion at~~ December 31, ~~2016.~~2017. Total loans, excluding PCI loans, were ~~$890.0~~$967.4 million at ~~September~~June 30, ~~2017,~~2018, increasing ~~$53.7~~$25.3 million, or ~~6.4%~~2.7%, from year end ~~2016.~~2017. Total PCI loans were ~~$45.5~~$39.9 million at ~~September~~June 30, ~~2017~~2018 versus ~~$52.0~~$44.3 million at ~~December 31, 2016.~~year end 2017.

During the first ~~nine~~six months of ~~2017, residential 1-4 family~~2018, loans grew ~~$21.9~~by $25.3 million, or ~~10.5%~~2.7%. Of this amount, $15.7 million was a pool of in-market mortgages purchased in late third quarter of 2017. Multifamily loans grew $14.6 million, or 37.2%, commercial loans grew $7.3 million, or 5.7%, commercial mortgage loans on real estate grew $6.0 million, or 1.8%, and constructionConstruction and land development loans grew ~~$4.3~~by $11.3 million, or 10.5%, commercial loans grew by $11.0 million, or 6.9%, and commercial mortgages grew by $9.8 million, or 2.7%. Offsetting these increases were declining balances in residential 1 – 4 family mortgages, which declined by $9.9 million, or 4.4%, and multifamily loans, which decreased $4.7 million, or 8.0%. In March 2018, the Company purchased an in-market, high quality consumer auto loan pool totaling $9.0 million. The addition of these loans brought an increase in diversification to the portfolio. This purchase resulted in an increase of $8.5 million in consumer installment loans for the six months ended June 30, 2018.

The Company’s securities portfolio, excluding restricted equity securities, declined ~~$5.8~~$7.8 million ~~or 2.2%, from $262.7~~since year end 2017 to total $243.2 million at ~~December 31, 2016 to $256.9 million at September~~June 30, ~~2017.~~2018. Net ~~realized gains~~losses of ~~$180,000~~$16,000 were ~~recognized~~realized during the ~~first nine months~~second quarter of ~~2017~~2018 through sales and call ~~activity, as compared with $608,000 recognized during~~activity. For the first ~~nine~~six months of ~~2016. The decline in the volume~~2018, there have been net gains of ~~securities was a strategic decision by management to fund strong loan growth with securities sales. Also, there were normal securities amortization, call activity,~~$14,000 realized through sales and ~~maturities.~~call activity. 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 ~~$210.4~~$199.2 million at ~~September~~June 30, ~~2017~~2018 and ~~$216.1~~$204.8 million at December 31, ~~2016.~~2017. At ~~September~~June 30, ~~2017,~~2018, the Company had a net unrealized ~~gain~~loss on the AFS portfolio of ~~$1.2~~$1.9 million compared with a net unrealized ~~loss~~gain of ~~$621,000~~$1.2 million at December 31, ~~2016.~~2017. Municipal securities comprised ~~59.1%~~60.3% of the total AFS portfolio at ~~September~~June 30, ~~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 ~~$22.6~~$23.8 million and ~~$21.1~~$22.0 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. There were federal funds sold of ~~$144,000~~$180,000 at ~~September~~June 30, ~~2017~~2018 and federal funds purchased of ~~$4.7~~$4.8 million at December 31, ~~2016.~~2017. Interest bearing bank balances were $12.0 million at June 30, 2018 compared with $7.3 million at December 31, 2017.

Interest bearing deposits at ~~September~~June 30, ~~2017~~2018 were ~~$933.1~~$971.9 million, an increase of ~~$24.6~~$29.2 million ~~or 2.7%,~~ from ~~$908.4 million at~~ December 31, ~~2016. MMDA~~2017. Time deposits less than or equal to $250,000 have shown the largest dollar volume growth during 2018 with $14.9 million in additional balances ~~have increased $33.1 million, or 29.7%, during 2017, the result of promotions at new branches. This growth has enabled management to allow brokered deposit balances of $38.9 million to mature~~ and ~~run-off. As a result, time~~now totaling $452.7 million. Time deposits over $250,000 ~~declined $9.9~~grew by $6.1 million ~~or 7.7%.~~and were $116.7 million at June 30, 2018. NOW accounts grew by $5.9 million and were $163.0 million at June 30, 2018.

FHLB advances were ~~$81.3~~$90.7 million at ~~September~~June 30, ~~2017,~~2018, compared with ~~$81.9~~$101.4 million at December 31, 2016. Long term debt was $0 at September 30, 2017 and $1.7 million at December 31, 2016. This borrowing, initially in the amount of $10.7 million, was obtained in April 2014, and the proceeds were used to redeem the Company’s then remaining outstanding TARP preferred stock. The Company fully paid this debt during the first quarter of 2017.

Shareholders’ equity was ~~$124.4~~$128.6 million at ~~September~~June 30, ~~2017~~2018 and ~~$114.5~~$124.0 million at December 31, ~~2016. Shareholders’~~2017. Shareholder’s equity ~~increased $9.9 million, or 8.6%, from year end 2016 due~~ to ~~an increase of $1.3 million in other comprehensive income related to net unrealized gains related to the investment portfolio~~assets was 9.5% at June 30, 2018 and ~~cash flow hedge, an increase of $786,000 in additional paid in capital and net income of $7.8 million in the first nine months of~~9.3% at December 31, 2017.

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.

37
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 ~~$15.4~~$12.5 million at ~~September~~June 30, ~~2017~~2018 and net ~~charge-offs~~recoveries were ~~$976,000~~$121,000 and $120,000 for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017.~~2018, respectively. 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.

Nonperforming loans were ~~$12.7~~$9.3 million at ~~September~~June 30, ~~2017,~~2018, a ~~$2.4 million~~$317,000 increase from ~~$10.2~~$9.0 million at December 31, ~~2016.~~2017. The ~~$2.4 million~~$317,000 increase in nonperforming loans since December 31, ~~2016~~2017 was the net result of ~~$7.0~~$2.6 million in additions to nonperforming loans and ~~$4.6~~$2.3 million in reductions. The increase related mainly to two residential 1-4 family construction relationships comprised of four loans totaling $1.3 million and one commercial real estate relationship loan of $964,000. With respect to the reductions in nonperforming loans, $1.1 million were payments to existing credits, ~~$1.2 million~~$101,000 were charge-offs, ~~$926,000~~$762,000 were ~~loans~~paid off, and $343,000 returned to accruing ~~status, $23,000 were loans transferred to OREO, and $1.4 million paid off.~~status.

The allowance for loan losses, excluding PCI, equaled ~~68.37%~~97.28% of nonaccrual loans at ~~September~~June 30, ~~2017~~2018 compared with ~~92.68%~~99.37% at December 31, ~~2016.~~2017. The ratio of nonperforming assets to loans and OREO ~~continued to decline.~~increased slightly. The ratio was ~~1.72%~~1.29% at ~~September~~June 30, ~~2017~~2018 versus ~~1.74%~~1.25% at December 31, ~~2016.~~2017.

The allowance for loan losses for each of the periods presented includes an amount that could not be related to individual types of loans and thus is referred to as the unallocated portion of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the provision of $450,000 taken during the year ended 2016 primarily due to loan growth resulted in an elevated unallocated amount of $1.5 million at December 31, 2016. Several factors justified the maintenance of this unallocated amount including an unusually low level of delinquencies at December 31, 2016, which the Company believed was unsustainable over the next several quarters and was not reflective of the Company’s experience, as well as the fact that the Company believed the allowance as reported was indicative of the credit risks of the loan portfolio at December 31, 2016. During 2017, delinquencies increased $3.4 million, net charge-offs were $976,000, nonaccrual loans increased $2.4 million and the Company took a provision of $150,000, all of which contributed to the reduction of the unallocated amount to $101,000 at September 30, 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, total impaired loans, excluding PCI loans, equaled ~~$18.0~~$17.4 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):

September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Nonaccrual loans $ 12,677 $ 10,243 $ 9,343 $ 9,026
Loans past due 90 days and accruing interest — —
Total nonperforming loans 12,677 10,243
OREO 2,710 4,427 3,147 2,791
Total nonperforming assets $ 15,387 $ 14,670 $ 12,490 $ 11,817

Accruing troubled debt restructure loans $ 5,313 $ 4,653 $ 8,087 $ 5,271

Balances
Specific reserve on impaired loans 965 1,130 1,390 959
General reserve related to unimpaired loans 7,702 8,363 7,699 8,010
Total allowance for loan losses 8,667 9,493 $ 9,089 $ 8,969

Average loans during the year, net of unearned income 856,465 787,245 $ 951,201 $ 870,258

Impaired loans 17,990 18,541 17,430 14,297
Non-impaired loans 871,990 817,758 949,931 927,721
Total loans, net of unearned income 889,980 836,299 $ 967,361 $ 942,018

Ratios
Allowance for loan losses to loans 0.97 % 1.14 % 0.94 % 0.95 %
Allowance for loan losses to nonperforming loans 68.37 92.68
Allowance for loan losses to nonaccrual loans 68.37 92.68 97.28 99.37
General reserve to non-impaired loans 0.88 1.02 0.81 0.86
Nonaccrual loans to loans 1.42 1.22 0.97 0.96
Nonperforming assets to loans and OREO 1.72 1.74 1.29 1.25
Net charge-offs to average loans 0.15 0.07
Net (recoveries) charge-offs to average loans (0.01 ) 0.12
38

The Company grants troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At ~~September~~June 30, ~~2017,~~2018, the Company had 23 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. Six of these loans totaling $3.3 million were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at ~~September~~June 30, ~~2017~~2018 was ~~$7.0~~$9.3 million, of which ~~$1.7~~$1.2 million 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”~~“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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 is below (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 2,140 $ 2,893 $ 1,578 $ 1,962
Commercial 3,492 1,758 2,274 1,498
Construction and land development 4,283 5,495 5,184 4,277
Agriculture 66 — — 68
Total real estate loans 9,981 10,146 9,036 7,805
Commercial loans 2,666 53 307 1,214
Consumer installment loans 30 44 — 7
Total loans $ 12,677 $ 10,243 $ 9,343 $ 9,026

At ~~September~~June 30, ~~2017,~~2018, the Company had ~~six~~nine 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 ~~September~~June 30, ~~2017~~2018 was ~~$4.3~~$5.2 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

The total amount of the allowance for loan losses attributed to all ~~six~~nine relationships was ~~$456,000~~$610,000 at ~~September~~June 30, ~~2017,~~2018, or ~~10.64%~~11.8% 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.

39
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~~four 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 ~~13.4%~~13.3% at ~~September~~June 30, ~~2017~~2018 compared with ~~13.2%~~12.7% at December 31, ~~2016.~~2017. The tier 1 risk-based capital ratio was ~~12.6%~~12.5% at ~~September~~June 30, ~~2017~~2018 and ~~12.2%~~11.9% at December 31, ~~2016.~~2017. The Company’s tier 1 leverage ratio was 10.0% at ~~September~~June 30, ~~2017~~2018 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 ~~12.2%~~12.1% at ~~September~~June 30, ~~2017~~2018 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 ~~September~~June 30, ~~2017,~~2018, the Company had a capital conservation buffer of ~~5.4%~~5.3%, well above the ~~2017~~2018 required buffer of ~~1.25%~~1.875%.

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was as follows (dollars in thousands):

September 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Cash and due from banks $ 9,750 $ 13,828 $ 11,607 $ 14,642
Interest bearing bank deposits 12,656 7,244 12,020 7,316
Federal funds sold 144 — 180 —
Available for sale securities, at fair value, unpledged 175,776 170,898 167,189 168,221
Total liquid assets $ 198,326 $ 191,970 $ 190,996 $ 190,179

Deposits and other liabilities $ 1,169,707 $ 1,135,280 $ 1,225,224 $ 1,212,187
Ratio of liquid assets to deposits and other liabilities 16.96 % 16.91 % 15.59 % 15.69 %
The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. During the second quarter of 2018 the Company obtained an additional line of credit of $20 million. The Company has a total of $55 million in this type of facility in aggregate.
44
40

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, is as follows (dollars in thousands):

September 30, 2017 December 31, 2016
Commitments with off-balance sheet risk:
Commitments to extend credit $ 153,330 $ 134,517
Standby letters of credit 6,636 7,151
Total commitments with off-balance sheet risks $ 159,966 $ 141,668
June 30, 2018 December 31, 2017
Commitments with off-balance sheet risk:
Commitments to extend credit $ 182,340 $ 163,686
Standby letters of credit 5,775 6,532
Total commitments with off-balance sheet risks $ 188,115 $ 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.

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 $387,000 and ~~an unrealized loss of $17,000 and $70,000~~$177,000 at ~~September~~June 30, ~~2017~~2018 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~~ was 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.

41
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 ~~September~~June 30, ~~2017~~2018 (dollars in thousands):

September 30, 2017 June 30, 2018
% $ % $
Change in Yield curve
+400 bp 0.2 91 5.7 2,682
+300 bp 0.2 90 4.3 2,014
+200 bp 0.2 70 2.7 1,277
+100 bp 0.1 45 1.0 481
most likely — — — —
-100 bp (0.4 ) (171 ) (2.7 ) (1,282 )
-200 bp (2.3 ) (1,015 ) (6.0 ) (2,822 )
-300 bp (2.5 ) (1,081 ) (8.1 ) (3,802 )
-400 bp (2.5 ) (1,085 ) (8.2 ) (3,823 )

At ~~September~~June 30, ~~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 ~~0.2%~~5.7%. 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 ~~2.5%~~8.2%. 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.

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.
42

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.

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.

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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 ~~September~~June 30, ~~2017~~2018 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.
48

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: November 8, 2017~~
Date: August 8, 2018
/s/ Bruce E. Thomas
Bruce E. Thomas
Executive Vice President and Chief Financial Officer
(principal financial officer)
Date: August 8, 2018

~~Date: November 8, 2017~~

44

	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

	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	$	3,202	$	3,221	$	3,684	$	3,740	$	2,661	$	2,681	$	9,183	$	9,199
Due after one year through five years		24,804		25,034		97,802		98,829		23,700		23,454		89,195		88,914
Due after five years through ten years		12,779		13,204		98,364		98,427		13,399		13,545		96,976		95,387
Due after ten years		5,675		5,866		9,397		9,451		4,229		4,234		5,754		5,663
Total securities	$	46,460	$	47,325	$	209,247	$	210,447	$	43,989	$	43,914	$	201,108	$	199,163

	September 30, 2017
	Less than 12 Months					12 Months or More					Total					June 30, 2018
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Less than 12 Months					12 Months or More					Total
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	$	17,662	$	(225	)	$	21,523	$	(333	)	$	39,185	$	(558	)	$	5,808	$	(51	)	$	17,032	$	(499	)	$	22,840	$	(550	)
U.S. Gov’t sponsored agencies		-		-			2,243		(36	)		2,243		(36	)		-		-			2,868		(30	)		2,868		(30	)
State, county and municipal		18,753		(203	)		8,252		(441	)		27,005		(644	)		48,387		(924	)		12,171		(712	)		60,558		(1,636	)
Corporate and other bonds		-		-			6,540		(67	)		6,540		(67	)		1,438		(19	)		2,102		(36	)		3,540		(55	)
Mortgage backed – U.S. Gov’t agencies		1,773		(23	)		1,898		(100	)		3,671		(123	)		951		(23	)		2,496		(201	)		3,447		(224	)
Mortgage backed – U.S. Gov’t sponsored agencies		7,482		(99	)		5,066		(159	)		12,548		(258	)		9,667		(212	)		9,416		(445	)		19,083		(657	)
Total	$	45,670	$	(550	)	$	45,522	$	(1,136	)	$	91,192	$	(1,686	)	$	66,251	$	(1,229	)	$	46,085	$	(1,923	)	$	112,336	$	(3,152	)

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies	$	9,922	$	(78	)	$	-	$	-		$	9,922	$	(78	)	$	-	$	-		$	9,713	$	(287	)	$	9,713	$	(287	)
State, county and municipal		2,423		(12	)		1,256		(30	)		3,679		(42	)		6,547		(108	)		1,241		(32	)		7,788		(140	)
Total	$	12,345	$	(90	)	$	1,256	$	(30	)	$	13,601	$	(120	)	$	6,547	$	(108	)	$	10,954	$	(319	)	$	17,501	$	(427	)

	September 30, 2017										June 30, 2018
	30-89 Days Past Due		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	$	579	$	2,140	$	2,719	$	227,026	$	229,745	$	1,104	$	1,578	$	2,682	$	214,928	$	217,610
Commercial		—		3,492		3,492		342,267		345,759		87		2,274		2,361		373,773		376,134
Construction and land development		—		4,283		4,283		98,311		102,594		65		5,184		5,249		113,861		119,110
Second mortgages		—		—		—		7,399		7,399		—		—		—		7,387		7,387
Multifamily		2,545		—		2,545		51,097		53,642		2,559		—		2,559		51,770		54,329
Agriculture		—		66		66		7,522		7,588		—		—		—		7,467		7,467
Total real estate loans		3,124		9,981		13,105		733,622		746,727		3,815		9,036		12,851		769,186		782,037
Commercial loans		603		2,666		3,269		133,374		136,643		—		307		307		169,758		170,065
Consumer installment loans		17		30		47		5,284		5,331		21		—		21		13,696		13,717
All other loans		—		—		—		1,279		1,279		—		—		—		1,542		1,542
Total loans	$	3,744	$	12,677	$	16,421	$	873,559	$	889,980	$	3,836	$	9,343	$	13,179	$	954,182	$	967,361

	Three Months Ended September 30, 2017												Three Months Ended June 30, 2018
	June 30, 2017		Provision Allocation			Charge-offs			Recoveries		September 30, 2017		March 31, 2018		Provision Allocation			Charge-offs			Recoveries		June 30, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	3,797	$	(444	)	$	(73	)	$	15	$	3,295	$	3,115	$	431		$	(53	)	$	58	$	3,551
Commercial		1,783		897			(457	)		14		2,237		2,620		(438	)		—			7		2,189
Construction and land development		1,383		(78	)		(180	)		—		1,125		1,612		(218	)		—			35		1,429
Second mortgages		33		9			—			2		44		34		(3	)		—			1		32
Multifamily		167		566			—			—		733		198		128			—			—		326
Agriculture		21		(2	)		—			—		19		33		(27	)		—			—		6
Total real estate loans		7,184		948			(710	)		31		7,453		7,612		(127	)		(53	)		101		7,533
Commercial loans		1,457		(193	)		(265	)		2		1,001		962		199			—			1		1,162
Consumer installment loans		111		26			(86	)		56		107		112		(12	)		(67	)		136		169
All other loans		9		(4	)		—			—		5		10		(10	)		—			3		3
Unallocated		728		(627	)		—			—		101		272		(50	)		—			—		222
Total loans	$	9,489	$	150		$	(1,061	)	$	89	$	8,667	$	8,968	$	—		$	(120	)	$	241	$	9,089

	Three Months Ended September 30, 2016												Three Months Ended June 30, 2017
	June 30, 2016		Provision Allocation			Charge-offs			Recoveries		September 30, 2016		March 31, 2017		Provision Allocation			Charge-offs			Recoveries		June 30, 2017
Mortgage loans on real estate:
Residential 1-4 family	$	2,445	$	739		$	(202	)	$	13	$	2,995	$	2,823	$	927		$	(12	)	$	59	$	3,797
Commercial		3,572		(1,057	)		—			21		2,536		1,776		(11	)		—			18		1,783
Construction and land development		1,577		(154	)		(15	)		1		1,409		1,547		(226	)		—			62		1,383
Second mortgages		46		(24	)		—			2		24		50		(19	)		—			2		33
Multifamily		293		297			—			—		590		193		(26	)		—			—		167
Agriculture		25		(9	)		—			—		16		32		(11	)		—			—		21
Total real estate loans		7,958		(208	)		(217	)		37		7,570		6,421		634			(12	)		141		7,184
Commercial loans		1,268		(392	)		—			—		876		1,316		260			(120	)		1		1,457
Consumer installment loans		102		38			(31	)		7		116		133		12			(78	)		44		111
All other loans		10		(3	)		—			—		7		15		(6	)		—			—		9
Unallocated		96		815			—			—		911		1,628		(900	)		—			—		728
Total loans	$	9,434	$	250		$	(248	)	$	44	$	9,480	$	9,513	$	—		$	(210	)	$	186	$	9,489

	Nine Months Ended September 30, 2017												Six Months Ended June 30, 2018
	December 31, 2016		Provision Allocation			Charge-offs			Recoveries		September 30, 2017		December 31, 2017		Provision Allocation			Charge-offs			Recoveries		June 30, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	2,769	$	545		$	(111	)	$	92	$	3,295	$	3,466	$	65		$	(53	)	$	73	$	3,551
Commercial		1,952		703			(457	)		39		2,237		2,423		(254	)		—			20		2,189
Construction and land development		2,195		(939	)		(194	)		63		1,125		1,247		146			—			36		1,429
Second mortgages		72		(79	)		—			51		44		24		6			—			2		32
Multifamily		260		473			—			—		733		496		(170	)		—			—		326
Agriculture		15		4			—			—		19		14		(8	)		—			—		6
Total real estate loans		7,263		707			(762	)		245		7,453		7,670		(215	)		(53	)		131		7,533
Commercial loans		602		779			(385	)		5		1,001		1,139		47			(39	)		15		1,162
Consumer installment loans		135		51			(209	)		130		107		110		(4	)		(112	)		175		169
All other loans		7		(2	)		—			—		5		3		(3	)		—			3		3
Unallocated		1,486		(1,385	)		—			—		101		47		175			—			—		222
Total loans	$	9,493	$	150		$	(1,356	)	$	380	$	8,667	$	8,969	$	—		$	(204	)	$	324	$	9,089

	Nine Months Ended September 30, 2016
	December 31, 2015		Provision Allocation			Charge-offs			Recoveries		September 30, 2016
Mortgage loans on real estate:
Residential 1-4 family	$	2,884	$	514		$	(527	)	$	124	$	2,995
Commercial		3,769		(1,171	)		(112	)		50		2,536
Construction and land development		1,298		123			(15	)		3		1,409
Second mortgages		96		(80	)		—			8		24
Multifamily		141		449			—			—		590
Agriculture		24		(8	)		—			—		16
Total real estate loans		8,212		(173	)		(654	)		185		7,570
Commercial loans		631		234			—			11		876
Consumer installment loans		93		94			(147	)		76		116
All other loans		25		(18	)		—			—		7
Unallocated		598		313			—			—		911
Total loans	$	9,559	$	450		$	(801	)	$	272	$	9,480

	Six Months Ended June 30, 2017
	December 31, 2016		Provision Allocation			Charge-offs			Recoveries		June 30, 2017
Mortgage loans on real estate:
Residential 1-4 family	$	2,769	$	989		$	(38	)	$	77	$	3,797
Commercial		1,952		(194	)		—			25		1,783
Construction and land development		2,195		(861	)		(14	)		63		1,383
Second mortgages		72		(88	)		—			49		33
Multifamily		260		(93	)		—			—		167
Agriculture		15		6			—			—		21
Total real estate loans		7,263		(241	)		(52	)		214		7,184
Commercial loans		602		972			(120	)		3		1,457
Consumer installment loans		135		25			(123	)		74		111
All other loans		7		2			—			—		9
Unallocated		1,486		(758	)		—			—		728
Total loans	$	9,493	$	—		$	(295	)	$	291	$	9,489

	September 30, 2017													June 30, 2018
	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	$	307		$	2,988	$	3,295	$	4,308	$	225,437	$	229,745	$	291	$	3,260	$	3,551	$	4,046	$	213,564	$	217,610
Commercial		119			2,118		2,237		6,415		339,344		345,759		458		1,731		2,189		5,124		371,010		376,134
Construction and land development		456			669		1,125		4,283		98,311		102,594		610		819		1,429		5,184		113,926		119,110
Second mortgages		—			44		44		—		7,399		7,399		—		32		32		—		7,387		7,387
Multifamily		—			733		733		—		53,642		53,642		—		326		326		2,559		51,770		54,329
Agriculture		8			11		19		66		7,522		7,588		—		6		6		—		7,467		7,467
Total real estate loans		890			6,563		7,453		15,072		731,655		746,727		1,359		6,174		7,533		16,913		765,124		782,037
Commercial loans		72			929		1,001		2,888		133,755		136,643		31		1,131		1,162		517		169,548		170,065
Consumer installment loans		4			103		107		30		5,301		5,331		—		169		169		—		13,717		13,717
All other loans		—			5		5		—		1,279		1,279		—		3		3		—		1,542		1,542
Unallocated		—	��		101		101		—		—		—		—		222		222		—		—		—
Total loans	$	966		$	7,701	$	8,667	$	17,990	$	871,990	$	889,980	$	1,390	$	7,699	$	9,089	$	17,430	$	949,931	$	967,361

	September 30, 2017										June 30, 2018
	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	223,878	$	3,638	$	2,229	$	—	$	229,745	$	212,594	$	3,349	$	1,667	$	—	$	217,610
Commercial		337,645		3,102		5,012		—		345,759		361,232		9,471		5,431		—		376,134
Construction and land development		98,132		179		4,283		—		102,594		113,722		204		5,184		—		119,110
Second mortgages		7,292		107		—		—		7,399		7,181		206		—		—		7,387
Multifamily		51,097		—		2,545		—		53,642		51,160		610		2,559		—		54,329
Agriculture		7,115		387		86		—		7,588		7,081		386		—		—		7,467
Total real estate loans		725,159		7,413		14,155		—		746,727		752,970		14,226		14,841		—		782,037
Commercial loans		133,173		769		2,701		—		136,643		166,560		3,165		340		—		170,065
Consumer installment loans		5,283		18		30		—		5,331		13,708		9		—		—		13,717
All other loans		1,279		—		—		—		1,279		1,542		—		—		—		1,542
Total loans	$	864,894	$	8,200	$	16,886	$	—	$	889,980	$	934,780	$	17,400	$	15,181	$	—	$	967,361

Balance, January 1, 2016	$	49,128
Accretion		(6,206	)
Reclassification from nonaccretable yield		5,433
Balance, December 31, 2016	$	48,355
Accretion		(4,353	)
Reclassification from nonaccretable yield		339
Balance, September 30, 2017	$	44,341

Balance, January 1, 2017	$	48,355
Accretion		(5,729	)
Reclassification from nonaccretable difference		1,500
Balance, December 31, 2017	$	44,126
Accretion		(2,670	)
Reclassification to nonaccretable difference		(310	)
Balance, June 30, 2018	$	41,146

	Three months ended September 30, 2017												Three months ended June 30, 2018
	Unrealized Gain (Loss) on Securities			Defined Benefit Pension Plan			Gain (Loss) on Cash Flow Hedge			Total Other Comprehensive Income (Loss)			Unrealized Gain (Loss) on Securities			Defined Benefit Pension Plan			Gain (Loss) on Cash Flow Hedge		Total Other Comprehensive (Loss) Income

Beginning balance	$	769		$	(756	)	$	(25	)	$	(12	)	$	(1,009	)	$	(1,048	)	$	283	$	(1,774	)
Other comprehensive income (loss) before reclassifications		43			-			35			78
Other comprehensive (loss) income before reclassifications														(520	)		-			19		(501	)
Amounts reclassified from AOCI		(31	)		-			-			(31	)		12			-			-		12
Net current period other comprehensive income (loss)		12			-			35			47
Net current period other comprehensive (loss) income														(508	)		-			19		(489	)
Ending balance	$	781		$	(756	)	$	10		$	35		$	(1,517	)	$	(1,048	)	$	302	$	(2,263	)

Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income)
	Three months ended
	September 30, 2017			September 30, 2016
Securities available for sale:
Unrealized gains on securities available for sale	$	(48	)	$	(88	)	Gain on securities transactions, net
Related tax expense		17			30		Income tax expense
	$	(31	)	$	(58	)	Net of tax

Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income
	Three months ended
	June 30, 2018			June 30, 2017
Securities available for sale:
Unrealized gain (loss) on securities available for sale	$	16		$	(37	)	Gain (loss) on securities transactions, net
Related tax expense		(4	)		13		Income tax expense
	$	12		$	(24	)	Net of tax

	September 30, 2017										June 30, 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	$	46,460	$	47,325	$	—	$	47,325	$	—	$	43,989	$	43,914	$	—	$	43,914	$	—
Loans, net of allowance		881,313		882,433		—		875,536		6,897		958,272		960,390		—		—		960,390
PCI loans, net of allowance		45,251		52,219		—		—		52,219		39,711		43,825		—		—		43,825

Financial liabilities:
Interest bearing deposits		933,054		933,819		—		933,819		—		971,944		969,945		—		969,945		—
Long-term borrowings		85,420		85,343		—		85,343		—
Borrowings												94,815		94,407		—		94,407		—

	Net Income (Numerator)		Weighted Average Common Shares (Denominator)		Per Common Share Amount		Net Income (Numerator)		Weighted Average Common Shares (Denominator)		Per Common Share Amount
For the three months ended September 30, 2017
For the three months ended June 30, 2018
Basic EPS	$	2,416		22,041	$	0.11	$	3,782		22,096	$	0.17
Effect of dilutive stock awards		—		501		—		—		484		—
Diluted EPS	$	2,416		22,542	$	0.11	$	3,782		22,580	$	0.17

For the three months ended September 30, 2016
For the three months ended June 30, 2017
Basic EPS	$	2,458		21,935	$	0.11	$	2,934		21,997	$	0.13
Effect of dilutive stock awards		—		192		—		—		427		—
Diluted EPS	$	2,458		22,127	$	0.11	$	2,934		22,424	$	0.13

For the nine months ended September 30, 2017
For the six months ended June 30, 2018
Basic EPS	$	7,843		22,000	$	0.36	$	6,376		22,086	$	0.29
Effect of dilutive stock awards		—		491		—		—		465		(0.01	)
Diluted EPS	$	7,843		22,491	$	0.35	$	6,376		22,551	$	0.28

For the nine months ended September 30, 2016
For the six months ended June 30, 2017
Basic EPS	$	7,196		21,902	$	0.33	$	5,427		21,979	$	0.25
Effect of dilutive stock awards		—		203		—		—		461		(0.01	)
Diluted EPS	$	7,196		22,105	$	0.33	$	5,427		22,440	$	0.24

	Three months ended September 30, 2017								Three months ended September 30, 2016
						Average								Average
	Average			Interest		Rates			Average			Interest		Rates
	Balance			Income/		Earned/			Balance			Income/		Earned/
	Sheet			Expense		Paid			Sheet			Expense		Paid
ASSETS:
Loans	$	869,501		$	10,127		4.62	%	$	801,017		$	9,156		4.54	%
Purchased credit impaired (PCI) loans		47,358			1,423		11.76			54,301			1,549		11.32
Total loans		916,859			11,550		5.00			855,318			10,705		4.97
Interest bearing bank balances		18,333			65		1.40			9,876			22		0.88
Federal funds sold		105			1		1.21			14			-		0.50
Securities (taxable)		182,703			1,171		2.56			172,591			1,133		2.63
Securities (tax exempt)⁽¹⁾		86,106			912		4.24			81,007			829		4.09
Total earning assets		1,204,106			13,699		4.51			1,118,806			12,689		4.50
Allowance for loan losses		(9,523	)							(9,861	)
Non-earning assets		89,935								87,419
Total assets	$	1,284,518							$	1,196,364

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing	$	280,253			284		0.40		$	234,828			156		0.26
Savings		90,774			60		0.26			86,327			58		0.27
Time deposits		567,800			1,709		1.19			514,312			1,336		1.03
Total deposits		938,827			2,053		0.87			835,467			1,550		0.74
Short-term borrowings		381			2		1.67			2,731			6		0.93
FHLB and other borrowings		77,617			308		1.57			111,757			295		1.05
Long-term debt		-			-		-			3,795			53		5.50
Total interest bearing liabilities		1,016,825			2,363		0.92			953,750			1,904		0.79
Noninterest bearing deposits		138,330								122,571
Other liabilities		5,395								5,753
Total liabilities		1,160,550								1,082,074
Shareholders' equity		123,968								114,290

Total liabilities and shareholders' equity	$	1,284,518							$	1,196,364
Net interest earnings				$	11,336							$	10,785
Interest spread							3.59	%							3.71	%
Net interest margin							3.74	%							3.82	%

Tax equivalent adjustment:
Securities				$	310							$	282

	September 30, 2017		December 31, 2016
Commitments with off-balance sheet risk:
Commitments to extend credit	$	153,330	$	134,517
Standby letters of credit		6,636		7,151
Total commitments with off-balance sheet risks	$	159,966	$	141,668

	September 30, 2017						June 30, 2018
	%			$			%			$
Change in Yield curve
+400 bp		0.2			91			5.7			2,682
+300 bp		0.2			90			4.3			2,014
+200 bp		0.2			70			2.7			1,277
+100 bp		0.1			45			1.0			481
most likely		—			—			—			—
-100 bp		(0.4	)		(171	)		(2.7	)		(1,282	)
-200 bp		(2.3	)		(1,015	)		(6.0	)		(2,822	)
-300 bp		(2.5	)		(1,081	)		(8.1	)		(3,802	)
-400 bp		(2.5	)		(1,085	)		(8.2	)		(3,823	)

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 ~~September~~June 30, ~~2017~~2018 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*

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)

	/s/ Rex L. Smith, III
	Rex L. Smith, III
	President and Chief Executive Officer
	(principal executive officer)



Date: August 8, 2018

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

Date: August 8, 2018