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

	For the quarterly period ended September 30, ~~2017~~2019
or
o or

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

	For the transition period fromto

Commission File Number: ~~001-32590~~

001‑32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

~~Virginia~~	~~20-2652949~~
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~~934‑9999 (Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 par value	ESXB	The NASDAQ Stock Market, LLC

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~~submit. 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, a 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~~12b‑2 of the Exchange Act.

Large accelerated filer	o ☐		Accelerated filer	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~~12b‑2 of the Exchange Act). Yes o☐ No þ☑

At September 30, ~~2017,~~2019, there were ~~22,047,833~~22,335,411 shares of the Company’s common stock outstanding.

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM ~~10-Q~~10‑Q

September 30, ~~2017~~2019

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
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	31 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45 44
Item 4. Controls and Procedures	47 45
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	47 45
Item 1A. Risk Factors	47 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47 45
Item 3. Defaults upon Senior Securities	47 46
Item 4. Mine Safety Disclosures	47 46
Item 5. Other Information	47 46
Item 6. Exhibits	48 46
SIGNATURES	49 47

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, ~~2017~~2019 AND DECEMBER 31, ~~2016~~2018

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


	September 30, 2019		December 31, 2018*
ASSETS
Cash and due from banks	$	23,056	$	18,292
Interest bearing bank deposits		13,742		15,927
Total cash and cash equivalents		36,798		34,219

Securities available for sale, at fair value		190,159		206,726
Securities held to maturity, at cost (fair value of $39,131 and $42,253, respectively)		38,213		42,108
Equity securities, restricted, at cost		8,929		7,800
Total securities		237,301		256,634

Loans held for sale		—		146

Loans		1,034,522		993,705
Purchased credit impaired (PCI) loans		33,958		38,285
Total loans		1,068,480		1,031,990
Allowance for loan losses (loans of $8,393 and $8,983, respectively; PCI loans of $156 and $156, respectively)		(8,549)		(9,139)
Net loans		1,059,931		1,022,851

Bank premises and equipment, net		29,713		31,488
Bank premises and equipment held for sale		1,589		1,252
Leased assets		6,709		—
Other real estate owned		4,740		1,099
Bank owned life insurance		29,161		28,834
Other assets		16,739		16,627
Total assets	$	1,422,681	$	1,393,150

LIABILITIES
Deposits:
Noninterest bearing	$	183,000	$	165,086
Interest bearing		994,241		999,889
Total deposits		1,177,241		1,164,975

Federal funds purchased		71		19,440
Federal Home Loan Bank borrowings		73,667		59,447
Trust preferred capital notes		4,124		4,124
Lease liabilities		6,967		—
Other liabilities		7,973		7,703
Total liabilities		1,270,043		1,255,689

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,335,411 and 22,132,304 shares issued and outstanding, respectively)		223		221
Additional paid in capital		150,264		148,763
Retained deficit		(586)		(10,244)
Accumulated other comprehensive income (loss)		2,737		(1,279)
Total shareholders’ equity		152,638		137,461
Total liabilities and shareholders’ equity	$	1,422,681	$	1,393,150

September 30, 2017 December 31, 2016
ASSETS
Cash and due from banks $ 9,750 $ 13,828
Interest bearing bank deposits 12,656 7,244
Federal funds sold 144 —
Total cash and cash equivalents 22,550 21,072

Securities available for sale, at fair value 210,447 216,121
Securities held to maturity, at cost (fair value of $47,325 and $46,858, respectively) 46,460 46,608
Equity securities, restricted, at cost 8,356 8,290
Total securities 265,263 271,019

Loans 889,980 836,299
Purchased credit impaired (PCI) loans 45,451 51,964
Total loans 935,431 888,263
Allowance for loan losses (loans of $8,667 and $9,493, respectively; PCI loans of $200 and $200, respectively) (8,867 ) (9,693 )
Net loans 926,564 878,570

Bank premises and equipment, net 29,469 28,357
Other real estate owned 2,710 4,427
Bank owned life insurance 27,911 27,339
Core deposit intangibles, net 20 898
Other assets 19,643 18,134
Total assets $ 1,294,130 $ 1,249,816

LIABILITIES
Deposits:
Noninterest bearing $ 145,328 $ 128,887
Interest bearing 933,054 908,407
Total deposits 1,078,382 1,037,294

Federal funds purchased — 4,714
Federal Home Loan Bank advances 81,296 81,887
Long-term debt — 1,670
Trust preferred capital notes 4,124 4,124
Other liabilities 5,905 5,591
Total liabilities 1,169,707 1,135,280

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
Additional paid in capital 147,453 146,667
Retained deficit (23,285 ) (31,128 )
Accumulated other comprehensive income (loss) 35 (1,223 )
Total shareholders’ equity 124,423 114,536
Total liabilities and shareholders’ equity $ 1,294,130 $ 1,249,816

*Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 AND ~~2016~~2018

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


	Three months ended				Nine months ended					Three months ended				Nine months ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016			September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest and dividend income
Interest and fees on loans	$	10,127	$	9,156	$	29,676	$	26,582		$	13,187	$	11,893	$	38,246	$	34,122
Interest and fees on PCI loans		1,423		1,549		4,355		4,704			2,333		1,265		4,877		3,937
Interest on federal funds sold		1		—		1		—			9		—		14		1
Interest on deposits in other banks		65		22		143		66			87		94		300		203
Interest and dividends on securities
Taxable		1,171		1,133		3,577		3,528			1,489		1,364		4,483		3,816
Nontaxable		602		547		1,805		1,698			355		528		1,252		1,654
Total interest and dividend income		13,389		12,407		39,557		36,578			17,460		15,144		49,172		43,733
Interest expense
Interest on deposits		2,053		1,550		5,776		4,638			3,698		2,699		10,521		7,197
Interest on borrowed funds		310		354		914		1,091			343		465		1,107		1,442
Total interest expense		2,363		1,904		6,690		5,729			4,041		3,164		11,628		8,639
Net interest income		11,026		10,503		32,867		30,849			13,419		11,980		37,544		35,094
Provision for loan losses		150		250		150		450			—		—		125		—
Net interest income after provision for loan losses		10,876		10,253		32,717		30,399			13,419		11,980		37,419		35,094
Noninterest income
Service charges on deposit accounts		678		617		2,011		1,785
Service charges and fees											758		626		2,074		1,818
Gain on securities transactions, net		48		88		180		608			50		68		274		82
Gain on sale of other loans											—		65		—		118
Income on bank owned life insurance		235		238		704		630			181		184		546		551
Mortgage loan income		59		252		163		599			176		97		338		288
Other		145		150		448		439			346		171		744		522
Total noninterest income		1,165		1,345		3,506		4,061			1,511		1,211		3,976		3,379
Noninterest expense
Salaries and employee benefits		4,998		4,676		14,566		13,848			5,289		5,029		15,943		15,897
Occupancy expenses		857		756		2,329		2,043			813		780		2,662		2,361
Equipment expenses		305		242		849		729			377		366		1,152		1,024
FDIC assessment		185		253		550		756			4		195		316		599
Data processing fees		501		410		1,466		1,230			594		482		1,741		1,467
Amortization of intangibles		62		477		878		1,430
Other real estate expense (income), net		37		28		98		(89	)
Other real estate expense, net											565		63		662		158
Other operating expenses		1,761		1,436		4,957		4,591			1,588		1,376		4,585		4,338
Total noninterest expense		8,706		8,278		25,693		24,538			9,230		8,291		27,061		25,844
Income before income taxes		3,335		3,320		10,530		9,922			5,700		4,900		14,334		12,629
Income tax expense		919		862		2,687		2,726			1,087		945		2,674		2,298
Net income	$	2,416	$	2,458	$	7,843	$	7,196		$	4,613	$	3,955	$	11,660	$	10,331
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										$	0.21	$	0.18	$	0.52	$	0.47
Net income per share — diluted										$	0.20	$	0.17	$	0.52	$	0.46
Weighted average number of shares outstanding
Basic		22,041		21,935		22,000		21,902			22,303		22,115		22,224		22,095
Diluted		22,542		22,127		22,491		22,105			22,561		22,627		22,475		22,576

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 AND ~~2016~~2018

(dollars in thousands)

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Net income $ 2,416 $ 2,458 $ 7,843 $ 7,196

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
Defined benefit pension plan:
Tax related to defined benefit pension plan — — 11 —
Cash flow hedge:
Change in unrealized gain (loss) in cash flow hedge 55 286 86 (391 )
Tax related to cash flow hedge (20 ) (97 ) (30 ) 133
Total other comprehensive income (loss) 47 (191 ) 1,258 2,449
Total comprehensive income $ 2,463 $ 2,267 $ 9,101 $ 9,645


	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Net income	$	4,613	$	3,955	$	11,660	$	10,331

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Change in unrealized gain (loss) on investment securities		1,215		(1,240)		5,818		(4,393)
Tax related to unrealized (gain) loss on investment securities		(267)		272		(1,279)		965
Reclassification adjustment for gain on securities sold		(50)		(68)		(274)		(82)
Tax related to realized gain on securities sold		11		15		60		18
Cash flow hedge:
Change in unrealized (loss) gain on cash flow hedge		(156)		(35)		(395)		177
Tax related to cash flow hedge		34		8		86		(39)
Total other comprehensive income (loss)		787		(1,048)		4,016		(3,354)
Total comprehensive income	$	5,400	$	2,907	$	15,676	$	6,977

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 AND ~~2016~~2018

(dollars and shares in thousands)

										Accumulated
					Additional					Other												Accumulated
	Common Stock				Paid in		Retained			Comprehensive								Additional				Other
	Shares		Amount		Capital		Deficit			Income (Loss)			Total		Common Stock			Paid in		Retained		Comprehensive
															Shares	Amount		Capital		Deficit		Income (Loss)		Total
Balance January 1, 2016		21,867	$	219	$	145,907	$	(41,050	)	$	(589	)	$	104,487

Balance June 30, 2019															22,258	$	223	$	149,752	$	(4,529)	$	1,950	$	147,396
Issuance of common stock		28		—		122		—			—			122	7		—		54		—		—		54
Exercise and issuance of employee stock options		52		—		475		—			—			475	70		—		458		—		—		458
Net income		—		—		—		7,196			—			7,196	—		—		—		4,613		—		4,613
Dividends paid on common stock ($0.03 per share)															—		—		—		(670)		—		(670)
Other comprehensive income		—		—		—		—			2,449			2,449	—		—		—		—		787		787
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
Balance September 30, 2019															22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638

Balance January 1, 2019															22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock		21		—		120		—			—			120	21		—		161		—		—		161
Exercise and issuance of employee stock options		67		—		666		—			—			666	182		2		1,340		—		—		1,342
Net income		—		—		—		7,843			—			7,843	—		—		—		11,660		—		11,660
Dividends paid on common stock ($0.09 per share)															—		—		—		(2,002)		—		(2,002)
Other comprehensive income		—		—		—		—			1,258			1,258	—		—		—		—		4,016		4,016
Balance September 30, 2017		22,048	$	220	$	147,453	$	(23,285	)	$	35		$	124,423
Balance September 30, 2019															22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638

Balance June 30, 2018															22,111	$	221	$	148,242	$	(17,556)	$	(2,263)	$	128,644
Issuance of common stock															6		—		48		—		—		48
Exercise and issuance of employee stock options															4		—		204		—		—		204
Net income															—		—		—		3,955		—		3,955
Other comprehensive loss															—		—		—		—		(1,048)		(1,048)
Balance September 30, 2018															22,121	$	221	$	148,494	$	(13,601)	$	(3,311)	$	131,803

Balance January 1, 2018															22,073	$	221	$	147,671	$	(23,932)	$	43	$	124,003
Issuance of common stock															13		—		122		—		—		122
Exercise and issuance of employee stock options															35		—		701		—		—		701
Net income															—		—		—		10,331		—		10,331
Other comprehensive loss															—		—		—		—		(3,354)		(3,354)
Balance September 30, 2018															22,121	$	221	$	148,494	$	(13,601)	$	(3,311)	$	131,803

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 AND ~~2016~~2018

(dollars in thousands)


	September 30, 2017			September 30, 2016			September 30, 2019		September 30, 2018
Operating activities:
Net income	$	7,843		$	7,196		$	11,660	$	10,331
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization		2,136			2,571
Depreciation								1,552		1,461
Leased asset amortization								699		—
Stock-based compensation expense		559			426			804		709
Tax benefit of exercised stock options		(105	)		(50	)		(150)		(43)
Amortization of purchased loan premium		141			191			236		195
Deferred tax expense								—		—
Provision for loan losses		150			450			125		—
Amortization of security premiums and accretion of discounts, net		1,331			1,307			905		1,215
Net gain on sale of securities		(180	)		(608	)		(274)		(82)
Net gain on sale and valuation of other real estate owned		(4	)		(315	)
Net (gain) loss on sale and valuation of other real estate owned								(81)		21
Net gain on sale of loans								—		(118)
Originations of mortgages held for sale		—			(49,185	)		(13,227)		(872)
Proceeds from sales of mortgages held for sale		—			51,286			13,373		872
Increase in bank owned life insurance investment		(572	)		(520	)		(327)		(551)
Changes in assets and liabilities:
(Increase) decrease in other assets		(1,526	)		334
Increase (decrease) in accrued expenses and other liabilities		400			(227	)
Increase in other assets								(661)		(912)
(Decrease) increase in accrued expenses and other liabilities								(117)		763
Net cash provided by operating activities		10,173			12,856			14,517		12,989

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								75,128		31,397
Proceeds from calls/maturities/paydowns of held to maturity securities								3,835		2,504
Proceeds from sales of restricted equity securities								866		1,828
Purchase of available for sale securities		(40,839	)		(43,494	)		(53,589)		(32,691)
Purchase of held to maturity securities		(643	)		(19,589	)
Purchase of equity securities, restricted		(1,321	)		(3,756	)
Purchase of restricted equity securities								(1,995)		(419)
Proceeds from sale of other real estate owned		2,118			1,851			638		1,434
Improvements of other real estate, net of insurance proceeds		—			(34	)
Net increase in loans		(49,063	)		(59,519	)		(42,707)		(21,782)
Principal recoveries of loans previously charged off		380			272			363		418
Purchase of premises and equipment, net		(2,370	)		(1,573	)		(121)		(4,297)
Purchase small business investment company fund investment		(525	)		(262	)		(875)		(420)
Purchase of bank owned life insurance investment		—			(5,000	)
Proceeds from sale of premises and equipment		—			145
Proceeds from sale of loans								705		5,635
Net cash used in investing activities		(43,035	)		(21,347	)		(17,752)		(16,393)

Financing activities:
Net increase in deposits		41,088			21,805			12,267		38,124
Net decrease in federal funds purchased		(4,714	)		(18,921	)
Net (decrease) increase in Federal Home Loan Bank borrowings		(591	)		13,426
Net (decrease) increase in federal funds purchased								(19,369)		5,151
Net increase (decrease) in short-term Federal Home Loan Bank borrowings								5,000		(26,500)
Proceeds from long-term Federal Home Loan Bank borrowings								10,137		—
Payments on long-term Federal Home Loan Bank borrowings								(917)		(11,109)
Proceeds from issuance of common stock		227			116			698		115
Payments on long-term debt		(1,670	)		(2,937	)
Cash dividends paid								(2,002)		—
Net cash provided by financing activities		34,340			13,489			5,814		5,781

Net increase in cash and cash equivalents		1,478			4,998			2,579		2,377

Cash and cash equivalents:
Beginning of the period		21,072			16,969			34,219		21,958
End of the period	$	22,550		$	21,967		$	36,798	$	24,335

Supplemental disclosures of cash flow information:
Interest paid	$	6,638		$	5,787		$	11,554	$	8,193
Income taxes paid		3,320			3,444			2,195		2,234
Transfer of OREO property		397			947
Transfers of loans to other real estate owned								4,198		396
Transfers of building premises and equipment to held for sale								337		1,252

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

~~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 2524 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates ~~one~~two loan production ~~office in Virginia.~~

offices.

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~~10‑K for the year ended December 31, ~~2016.~~2018. 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 30, ~~2017,~~2019, the statements of income and comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, ~~2017,~~2019, and the statements of ~~changes in shareholders’ equity and~~ cash flows for the nine months ended September 30, ~~2017.~~2019. Results for the nine month period ended September 30, ~~2017~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~

2019.

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

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

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

~~Recent Accounting Pronouncements~~

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

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

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

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

~~Also in March 2017, the FASB issued ASU No. 2017-07,~~~~Compensation — Retirement Benefits (Topic 715): Improving the Presentation~~Table 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~~.Contents

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

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

~~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 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows(dollars in thousands):


	September 30, 2019
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	7,991	$	—	$	(34)	$	7,957
U.S. Government agencies		23,098		75		(218)		22,955
State, county and municipal		90,806		3,885		(21)		94,670
Mortgage backed securities		46,798		1,120		(124)		47,794
Asset backed securities		10,703		49		(44)		10,708
Corporate bonds		6,011		67		(3)		6,075
Total Securities Available for Sale	$	185,407	$	5,196	$	(444)	$	190,159

Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(36)	$	9,964
State, county and municipal		28,213		956		(2)		29,167
Total Securities Held to Maturity	$	38,213	$	956	$	(38)	$	39,131

September 30, 2017
Gross Unrealized
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
U.S. Gov’t sponsored agencies 2,779 — (36 ) 2,743
State, county and municipal 122,318 2,655 (644 ) 124,329
Corporate and other bonds 14,947 142 (67 ) 15,022
Mortgage backed – U.S. Gov’t agencies 5,659 47 (123 ) 5,583
Mortgage backed – U.S. Gov’t sponsored agencies 16,625 16 (258 ) 16,383
Total Securities Available for Sale $ 209,247 $ 2,886 $ (1,686 ) $ 210,447

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 10,000 $ — $ (78 ) $ 9,922
State, county and municipal 35,965 974 (42 ) 36,897
Mortgage backed – U.S. Gov’t agencies 495 11 — 506
Total Securities Held to Maturity $ 46,460 $ 985 $ (120 ) $ 47,325

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, 2018
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	13,460	$	—	$	(336)	$	13,124
U.S. Government agencies		24,689		71		(151)		24,609
State, county and municipal		112,465		1,018		(941)		112,542
Mortgage backed securities		46,877		196		(656)		46,417
Asset backed securities		5,342		73		(4)		5,411
Corporate bonds		4,685		—		(62)		4,623
Total Securities Available for Sale	$	207,518	$	1,358	$	(2,150)	$	206,726

Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(210)	$	9,790
State, county and municipal		32,108		419		(64)		32,463
Total Securities Held to Maturity	$	42,108	$	419	$	(274)	$	42,253

The amortized cost and fair value of securities at September 30, ~~2017~~2019 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
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	13,577	$	13,557	$	20,456	$	20,514
Due after one year through five years		16,728		17,374		71,763		72,693
Due after five years through ten years		7,427		7,674		76,111		79,244
Due after ten years		481		526		17,077		17,708
Total securities	$	38,213	$	39,131	$	185,407	$	190,159

Held to Maturity Available for Sale
(dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less $ 3,202 $ 3,221 $ 3,684 $ 3,740
Due after one year through five years 24,804 25,034 97,802 98,829
Due after five years through ten years 12,779 13,204 98,364 98,427
Due after ten years 5,675 5,866 9,397 9,451
Total securities $ 46,460 $ 47,325 $ 209,247 $ 210,447

Table of Contents

Proceeds from sales and calls of securities ~~available for sale~~ were ~~$9.1~~$16.4 million and ~~$22.2~~$8.4 million during the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$30.1~~$57.5 million and ~~$93.7~~$24.2 million for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Gains and losses on ~~the sale of~~ securities transactions are determined using the specific identification method. Gross realized gains and losses on ~~sales of~~ securities ~~available for sale~~transactions during the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 were as follows ~~(dollars~~(dollars in thousands):


	Three Months Ended						Nine Months Ended						Three months ended				Nine months ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Gross realized gains	$	114		$	191		$	378		$	1,223		$	87	$	93	$	504	$	161
Gross realized losses		(66	)		(103	)		(198	)		(615	)		(37)		(25)		(230)		(79)
Net securities gains	$	48		$	88		$	180		$	608
Net securities (loss) gain													$	50	$	68	$	274	$	82

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 months ended September 30, ~~2017~~2019 and ~~2016.~~

2018.

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 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows (dollars in thousands):


	September 30, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	—	$	—	$	7,957	$	(34)	$	7,957	$	(34)
U.S. Government agencies		7,516		(103)		7,051		(115)		14,567		(218)
State, county and municipal		568		(9)		618		(12)		1,186		(21)
Mortgage backed securities		8,916		(43)		5,989		(81)		14,905		(124)
Asset backed securities		5,602		(40)		654		(4)		6,256		(44)
Corporate bonds		998		(3)		—		—		998		(3)
Total	$	23,600	$	(198)	$	22,269	$	(246)	$	45,869	$	(444)

Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,964	$	(36)	$	9,964	$	(36)
State, county and municipal		594		(1)		625		(1)		1,219		(2)
Total	$	594	$	(1)	$	10,589	$	(37)	$	11,183	$	(38)

September 30, 2017
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 17,662 $ (225 ) $ 21,523 $ (333 ) $ 39,185 $ (558 )
U.S. Gov’t sponsored agencies - - 2,243 (36 ) 2,243 (36 )
State, county and municipal 18,753 (203 ) 8,252 (441 ) 27,005 (644 )
Corporate and other bonds - - 6,540 (67 ) 6,540 (67 )
Mortgage backed – U.S. Gov’t agencies 1,773 (23 ) 1,898 (100 ) 3,671 (123 )
Mortgage backed – U.S. Gov’t sponsored agencies 7,482 (99 ) 5,066 (159 ) 12,548 (258 )
Total $ 45,670 $ (550 ) $ 45,522 $ (1,136 ) $ 91,192 $ (1,686 )

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 9,922 $ (78 ) $ - $ - $ 9,922 $ (78 )
State, county and municipal 2,423 (12 ) 1,256 (30 ) 3,679 (42 )
Total $ 12,345 $ (90 ) $ 1,256 $ (30 ) $ 13,601 $ (120 )


	December 31, 2016															December 31, 2018
	Less than 12 Months					12 Months or More					Total					Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies	$	29,756	$	(324	)	$	25,155	$	(439	)	$	54,911	$	(763	)
U.S. Gov’t sponsored agencies		-		-			2,523		(116	)		2,523		(116	)
U.S. Treasury securities																$	1,480	$	(1)	$	11,644	$	(335)	$	13,124	$	(336)
U.S. Government agencies																	6,959		(47)		5,155		(104)		12,114		(151)
State, county and municipal		39,713		(848	)		3,885		(312	)		43,598		(1,160	)		7,918		(81)		34,540		(860)		42,458		(941)
Corporate and other bonds		6,864		(103	)		8,639		(330	)		15,503		(433	)
Mortgage backed – U.S. Gov’t agencies		1,598		(18	)		1,897		(101	)		3,495		(119	)
Mortgage backed – U.S. Gov’t sponsored agencies		9,247		(313	)		-		-			9,247		(313	)
Mortgage backed securities																	11,513		(94)		15,811		(562)		27,324		(656)
Asset backed securities																	537		(1)		294		(3)		831		(4)
Corporate bonds																	3,661		(47)		236		(15)		3,897		(62)
Total	$	87,178	$	(1,606	)	$	42,099	$	(1,298	)	$	129,277	$	(2,904	)	$	32,068	$	(271)	$	67,680	$	(1,879)	$	99,748	$	(2,150)

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies	$	9,846	$	(154	)	$	-	$	-		$	9,846	$	(154	)
U.S. Government agencies																$	—	$	—	$	9,790	$	(210)	$	9,790	$	(210)
State, county and municipal		8,052		(185	)		-		-			8,052		(185	)		2,452		(20)		3,985		(44)		6,437		(64)
Total	$	17,898	$	(339	)	$	-	$	-		$	17,898	$	(339	)	$	2,452	$	(20)	$	13,775	$	(254)	$	16,227	$	(274)

Table of Contents

The unrealized losses (impairments) in the investment portfolio at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 are generally a result of market fluctuations of interest rates that occur daily. Interest rates increased consistently across the United States Treasury security yield curve during 2018, thereby increasing unrealized losses on securities. Likewise, these interest rates consistently decreased during 2019, thereby decreasing unrealized losses on the Company’s securities. The unrealized losses are from ~~119~~53 securities at September 30, ~~2017.~~2019. Of those, ~~107~~46 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~~Five investment grade asset-backed securities comprised of student loan pools included in corporate obligations and ~~other bond obligations comprise~~two corporate bonds make up the remaining securities with unrealized losses at September 30, ~~2017.~~2019. 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~~ $46.2million and ~~$75.8~~$56.0 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of ~~$3.9~~$6.5 million and ~~$4.4~~$7.0 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, there were no securities purchased from a single issuer, other than U.S. Treasury ~~issue~~securities 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 30, ~~2017~~2019 and December 31, ~~2016~~2018 were comprised of the following (dollars in thousands):


	September 30, 2017					December 31, 2016					September 30, 2019				December 31, 2018
	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	%
Residential 1‑4 family											$	222,003	21.46	%	$	216,268	21.77	%
Commercial		345,759		38.85			339,804		40.63			393,064	38.00			379,904	38.23
Construction and land development		102,594		11.53			98,282		11.75			130,977	12.66			120,413	12.12
Second mortgages		7,399		0.83			7,911		0.95			6,384	0.62			6,778	0.68
Multifamily		53,642		6.03			39,084		4.67			73,774	7.13			59,557	5.99
Agriculture		7,588		0.85			7,185		0.86			9,457	0.91			8,370	0.84
Total real estate loans		746,727		83.91			700,129		83.72			835,659	80.78			791,290	79.63
Commercial loans		136,643		15.35			129,300		15.46			185,999	17.98			188,722	18.99
Consumer installment loans		5,331		0.60			5,627		0.67			11,883	1.15			12,048	1.21
All other loans		1,279		0.14			1,243		0.15			981	0.09			1,645	0.17
Total loans	$	889,980		100.00	%	$	836,299		100.00	%	$	1,034,522	100.00	%	$	993,705	100.00	%

The Company held ~~$16.7 million~~$14.9 and ~~$15.8~~$17.4 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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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 and $749,000~~$1.2 million at each of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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.

Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company’s allowance for ~~credit~~loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with ~~FASB ASC~~Financial Accounting Standards Board

Table of Contents

(FASB) Accounting Standards Codification (ASC) 310,Receivables,(ii) a general valuation component calculated in accordance with FASB ~~Accounting Standards Codification (ASC)~~ASC 450,Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

The following table summarizes information related to impaired loans as of September 30, ~~2017~~2019 and for the three and nine months ended September 30, 2019 (dollars in thousands):

Three months ended Nine months ended
September 30, 2017 September 30, 2017 September 30, 2017
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,929 $ 2,257 $ — $ 1,935 $ 7 $ 1,941 $ 21
Commercial 3,905 4,510 — 3,802 39 4,582 114
Agriculture — — — 129 — 65 —
Total real estate loans 5,834 6,767 — 5,866 46 6,588 135
Commercial loans 1,248 1,248 — 624 — 612 —
Subtotal impaired loans with no valuation allowance 7,082 8,015 — 6,490 46 7,200 135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,379 2,831 307 2,373 20 2,426 59
Commercial 2,510 2,920 119 2,653 2 1,580 6
Construction and land development 4,283 5,542 456 4,290 — 4,595 —
Agriculture 66 68 8 33 — 16 —
Total real estate loans 9,238 11,361 890 9,349 22 8,617 65
Commercial loans 1,640 1,923 72 1,570 1 869 3
Consumer installment loans 30 33 4 20 — 91 —
Subtotal impaired loans with a valuation allowance 10,908 13,317 966 10,939 23 9,577 68
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,308 5,088 307 4,308 27 4,367 80
Commercial 6,415 7,430 119 6,455 41 6,162 120
Construction and land development 4,283 5,542 456 4,290 — 4,595 —
Agriculture 66 68 8 162 — 81 —
Total real estate loans 15,072 18,128 890 15,215 68 15,205 200
Commercial loans 2,888 3,171 72 2,194 1 1,481 3
Consumer installment loans 30 33 4 20 — 91 —
Total impaired loans $ 17,990 $ 21,332 $ 966 $ 17,429 $ 69 $ 16,777 $ 203


							Three months ended				Nine months ended
	September 30, 2019						September 30, 2019				September 30, 2019
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Rcognized		Investment		Rcognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,506	$	1,861	$	—	$	1,514	$	11	$	1,534	$	32
Commercial		3,286		4,000		—		3,308		35		3,372		103
Construction and land development		329		329		—		164		—		82		—
Multifamily		2,494		2,494		—		2,510		—		2,533		—
Total real estate loans		7,615		8,684		—		7,496		46		7,521		135
Subtotal impaired loans with no valuation allowance		7,615		8,684		—		7,496		46		7,521		135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,462		1,786		350		1,862		12		1,965		36
Commercial		396		883		84		552		2		847		6
Construction and land development		77		177		16		2,084		—		3,210		—
Total real estate loans		1,935		2,846		450		4,498		14		6,022		42
Commercial loans		847		852		469		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Subtotal impaired loans with a valuation allowance		2,789		3,705		920		5,584		18		7,645		55
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,968		3,647		350		3,376		23		3,499		68
Commercial		3,682		4,883		84		3,860		37		4,219		109
Construction and land development		406		506		16		2,248		—		3,292		—
Multifamily		2,494		2,494		—		2,510		—		2,533		—
Total real estate loans		9,550		11,530		450		11,994		60		13,543		177
Commercial loans		847		852		469		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Total impaired loans	$	10,404	$	12,389	$	920	$	13,080	$	64	$	15,166	$	190

⁽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.

Table of Contents

The following table summarizes information related to impaired loans as of December 31, ~~2016~~2018 and for the three and nine months ended September 30, ~~2016~~2018 (dollars in thousands):

Three months ended Nine months ended
December 31, 2016 September 30, 2016 September 30, 2016
Recorded
Investment⁽¹⁾ Unpaid
Principal
Balance⁽²⁾ Related
Allowance Average
Investment Interest
Recognized Average
Investment Interest
Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,704 $ 1,931 $ — $ 2,410 $ 5 $ 2,433 $ 13
Commercial 6,570 7,078 — 4,198 39 4,247 117
Second mortgages — — — 135 — 68 —
Total real estate loans 8,274 9,009 — 6,743 44 6,748 130
Commercial loans 1,200 1,200 — — — — —
Consumer installment loans — — — 122 — 123 —
Subtotal impaired loans with no valuation allowance 9,474 10,209 — 6,865 44 6,871 130
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,621 3,062 283 2,825 15 3,113 46
Commercial 617 1,051 73 475 2 478 6
Construction and land development 5,495 6,746 730 5,694 — 5,098 —
Second mortgages — — — — — 40 —
Total real estate loans 8,733 10,859 1,086 8,994 17 8,729 52
Commercial loans 53 53 7 54 — 40 —
Consumer installment loans 281 285 37 200 1 140 4
Subtotal impaired loans with a valuation allowance 9,067 11,197 1,130 9,248 18 8,909 56
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,325 4,993 283 5,235 20 5,546 59
Commercial 7,187 8,129 73 4,673 41 4,725 123
Construction and land development 5,495 6,746 730 5,694 — 5,098 —
Second mortgages — — — 135 — 108 —
Total real estate loans 17,007 19,868 1,086 15,737 61 15,477 182
Commercial loans 1,253 1,253 7 54 — 40 —
Consumer installment loans 281 285 37 322 1 263 4
Total impaired loans $ 18,541 $ 21,406 $ 1,130 $ 16,113 $ 62 $ 15,780 $ 186


							Three months ended				Nine months ended
	December 31, 2018						September 30, 2018				September 30, 2018
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Rcognized		Investment		Rcognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,563	$	1,890	$	—	$	1,716	$	11	$	1,802	$	33
Commercial		3,502		4,176		—		3,561		38		3,702		112
Construction and land development		—		—		—		426		—		318		—
Multifamily		2,559		2,559		—		2,559		31		1,279		92
Total real estate loans		7,624		8,625		—		8,262		80		7,101		237
Commercial loans		—		—		—		136		—		589		—
Subtotal impaired loans with no valuation allowance		7,624		8,625		—		8,398		80		7,690		237
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		2,131		2,538		349		2,298		20		2,266		57
Commercial		1,550		2,034		482		1,600		4		1,063		13
Construction and land development		4,571		5,840		515		4,471		—		4,589		—
Agriculture		—		—		—		—		—		34		—
Total real estate loans		8,252		10,412		1,346		8,369		24		7,952		70
Commercial loans		1,983		1,991		900		478		1		383		3
Consumer installment loans		—		—		—		3		—		4		—
Subtotal impaired loans with a valuation allowance		10,235		12,403		2,246		8,850		25		8,339		73
Total:
Mortgage loans on real estate:
Residential 1‑4 family		3,694		4,428		349		4,014		31		4,068		90
Commercial		5,052		6,210		482		5,161		42		4,765		125
Construction and land development		4,571		5,840		515		4,897		—		4,907		—
Multifamily		2,559		2,559		—		2,559		31		1,279		92
Agriculture		—		—		—		—		—		34		—
Total real estate loans		15,876		19,037		1,346		16,631		104		15,053		307
Commercial loans		1,983		1,991		900		614		1		972		3
Consumer installment loans		—		—		—		3		—		4		—
Total impaired loans	$	17,859	$	21,028	$	2,246	$	17,248	$	105	$	16,029	$	310

⁽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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, is set forth in the table below (dollars in thousands):


	September 30, 2019		December 31, 2018
Nonaccruals	$	5,746	$	9,500
Trouble debt restructure and still accruing		4,658		8,359
Total impaired	$	10,404	$	17,859

September 30, 2017 December 31, 2016
Nonaccruals $ 12,677 $ 10,243
Trouble debt restructure and still accruing 5,313 4,653
Substandard and still accruing — 3,645
Total impaired $ 17,990 $ 18,541

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 months ended September 30, ~~2017~~2019 and ~~2016.~~2018. For the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, estimated interest income of ~~$224,000~~$92,000 and ~~$198,000,~~$167,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, estimated interest income of ~~$550,000~~$284,000 and ~~$588,000,~~ $471,000,

Table of Contents

respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

There were no loans greater than 90 days past due and still accruing interest at each of September 30, ~~2017~~2019 and December 31, ~~2016.~~2018. The following tables present an age analysis of past due status of loans by category as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019
	30‑89 Days				Total Past				Total Loans
	Past Due		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,141	$	1,349	$	2,490	$	219,513	$	222,003
Commercial		107		1,059		1,166		391,898		393,064
Construction and land development		—		406		406		130,571		130,977
Second mortgages		229		—		229		6,155		6,384
Multifamily		—		2,494		2,494		71,280		73,774
Agriculture		50		—		50		9,407		9,457
Total real estate loans		1,527		5,308		6,835		828,824		835,659
Commercial loans		—		431		431		185,568		185,999
Consumer installment loans		13		7		20		11,863		11,883
All other loans		—		—		—		981		981
Total loans	$	1,540	$	5,746	$	7,286	$	1,027,236	$	1,034,522



											December 31, 2018
	September 30, 2017										30‑89 Days				Total Past				Total Loans
	30-89 Days Past Due		Nonaccrual		Total Past Due		Current		Total Loans Receivable		Past Due		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1-4 family	$	579	$	2,140	$	2,719	$	227,026	$	229,745
Residential 1‑4 family											$	495	$	1,257	$	1,752	$	214,516	$	216,268
Commercial		—		3,492		3,492		342,267		345,759		551		2,123		2,674		377,230		379,904
Construction and land development		—		4,283		4,283		98,311		102,594		59		4,571		4,630		115,783		120,413
Second mortgages		—		—		—		7,399		7,399		—		—		—		6,778		6,778
Multifamily		2,545		—		2,545		51,097		53,642		2,559		—		2,559		56,998		59,557
Agriculture		—		66		66		7,522		7,588		—		—		—		8,370		8,370
Total real estate loans		3,124		9,981		13,105		733,622		746,727		3,664		7,951		11,615		779,675		791,290
Commercial loans		603		2,666		3,269		133,374		136,643		80		1,549		1,629		187,093		188,722
Consumer installment loans		17		30		47		5,284		5,331		10		—		10		12,038		12,048
All other loans		—		—		—		1,279		1,279		—		—		—		1,645		1,645
Total loans	$	3,744	$	12,677	$	16,421	$	873,559	$	889,980	$	3,754	$	9,500	$	13,254	$	980,451	$	993,705

December 31, 2016
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
Commercial — 1,758 1,758 338,046 339,804
Construction and land development 54 5,495 5,549 92,733 98,282
Second mortgages — — — 7,911 7,911
Multifamily — — — 39,084 39,084
Agriculture — — — 7,185 7,185
Total real estate loans 350 10,146 10,496 689,633 700,129
Commercial loans — 53 53 129,247 129,300
Consumer installment loans 3 44 47 5,580 5,627
All other loans — — — 1,243 1,243
Total loans $ 353 $ 10,243 $ 10,596 $ 825,703 $ 836,299

Table of Contents

Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 is presented in the following tables (dollars in thousands):


	Three Months Ended September 30, 2019
			Provision
	June 30, 2019		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,894	$	(35)	$	(144)	$	26	$	2,741
Commercial		2,026		1		—		7		2,034
Construction and land development		1,399		(587)		(200)		18		630
Second mortgages		81		(7)		—		2		76
Multifamily		192		17		—		41		250
Agriculture		32		15		—		—		47
Total real estate loans		6,624		(596)		(344)		94		5,778
Commercial loans		1,999		(229)		(98)		3		1,675
Consumer installment loans		185		32		(134)		53		136
All other loans		8		—		—		—		8
Unallocated		3		793		—		—		796
Total loans	$	8,819	$	—	$	(576)	$	150	$	8,393


													Three Months Ended September 30, 2018
	Three Months Ended September 30, 2017														Provision
	June 30, 2017		Provision Allocation			Charge-offs			Recoveries		September 30, 2017		June 30, 2018		Allocation		Charge-offs		Recoveries		September 30, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	3,797	$	(444	)	$	(73	)	$	15	$	3,295
Residential 1‑4 family													$	3,551	$	(392)	$	(35)	$	42	$	3,166
Commercial		1,783		897			(457	)		14		2,237		2,189		(477)		—		7		1,719
Construction and land development		1,383		(78	)		(180	)		—		1,125		1,429		(270)		(116)		1		1,044
Second mortgages		33		9			—			2		44		32		(2)		—		2		32
Multifamily		167		566			—			—		733		326		(2)		—		—		324
Agriculture		21		(2	)		—			—		19		6		—		—		—		6
Total real estate loans		7,184		948			(710	)		31		7,453		7,533		(1,143)		(151)		52		6,291
Commercial loans		1,457		(193	)		(265	)		2		1,001		1,162		380		(6)		31		1,567
Consumer installment loans		111		26			(86	)		56		107		169		20		(33)		11		167
All other loans		9		(4	)		—			—		5		3		2		—		—		5
Unallocated		728		(627	)		—			—		101		222		741		—		—		963
Total loans	$	9,489	$	150		$	(1,061	)	$	89	$	8,667	$	9,089	$	—	$	(190)	$	94	$	8,993


													Nine Months Ended September 30, 2019
	Three Months Ended September 30, 2016														Provision
	June 30, 2016		Provision Allocation			Charge-offs			Recoveries		September 30, 2016		December 31, 2018		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1-4 family	$	2,445	$	739		$	(202	)	$	13	$	2,995
Residential 1‑4 family													$	2,281	$	394	$	(178)	$	244	$	2,741
Commercial		3,572		(1,057	)		—			21		2,536		1,810		430		(277)		71		2,034
Construction and land development		1,577		(154	)		(15	)		1		1,409		1,161		(390)		(212)		71		630
Second mortgages		46		(24	)		—			2		24		20		51		—		5		76
Multifamily		293		297			—			—		590		371		(162)		—		41		250
Agriculture		25		(9	)		—			—		16		17		30		—		—		47
Total real estate loans		7,958		(208	)		(217	)		37		7,570		5,660		353		(667)		432		5,778
Commercial loans		1,268		(392	)		—			—		876		1,894		129		(355)		7		1,675
Consumer installment loans		102		38			(31	)		7		116		152		116		(234)		102		136
All other loans		10		(3	)		—			—		7		12		(4)		—		—		8
Unallocated		96		815			—			—		911		1,265		(469)		—		—		796
Total loans	$	9,434	$	250		$	(248	)	$	44	$	9,480	$	8,983	$	125	$	(1,256)	$	541	$	8,393

Nine Months Ended September 30, 2017
December 31, 2016 Provision
Allocation Charge-offs Recoveries September 30, 2017
Mortgage loans on real estate:
Residential 1-4 family $ 2,769 $ 545 $ (111 ) $ 92 $ 3,295
Commercial 1,952 703 (457 ) 39 2,237
Construction and land development 2,195 (939 ) (194 ) 63 1,125
Second mortgages 72 (79 ) — 51 44
Multifamily 260 473 — — 733
Agriculture 15 4 — — 19
Total real estate loans 7,263 707 (762 ) 245 7,453
Commercial loans 602 779 (385 ) 5 1,001
Consumer installment loans 135 51 (209 ) 130 107
All other loans 7 (2 ) — — 5
Unallocated 1,486 (1,385 ) — — 101
Total loans $ 9,493 $ 150 $ (1,356 ) $ 380 $ 8,667

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

Table of Contents


	Nine Months Ended September 30, 2018
			Provision
	December 31, 2017		Allocation		Charge-offs		Recoveries		September 30, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	3,466	$	(327)	$	(88)	$	115	$	3,166
Commercial		2,423		(731)		—		27		1,719
Construction and land development		1,247		(124)		(116)		37		1,044
Second mortgages		24		4		—		4		32
Multifamily		496		(172)		—		—		324
Agriculture		14		(8)		—		—		6
Total real estate loans		7,670		(1,358)		(204)		183		6,291
Commercial loans		1,139		427		(45)		46		1,567
Consumer installment loans		110		16		(145)		186		167
All other loans		3		(1)		—		3		5
Unallocated		47		916		—		—		963
Total loans	$	8,969	$	—	$	(394)	$	418	$	8,993

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	350	$	2,391	$	2,741	$	2,968	$	219,035	$	222,003
Commercial		84		1,950		2,034		3,682		389,382		393,064
Construction and land development		16		614		630		406		130,571		130,977
Second mortgages		—		76		76		—		6,384		6,384
Multifamily		—		250		250		2,494		71,280		73,774
Agriculture		—		47		47		—		9,457		9,457
Total real estate loans		450		5,328		5,778		9,550		826,109		835,659
Commercial loans		469		1,206		1,675		847		185,152		185,999
Consumer installment loans		1		135		136		7		11,876		11,883
All other loans		—		8		8		—		981		981
Unallocated		—		796		796		—		—		—
Total loans	$	920	$	7,473	$	8,393	$	10,404	$	1,024,118	$	1,034,522

September 30, 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 $ 307 $ 2,988 $ 3,295 $ 4,308 $ 225,437 $ 229,745
Commercial 119 2,118 2,237 6,415 339,344 345,759
Construction and land development 456 669 1,125 4,283 98,311 102,594
Second mortgages — 44 44 — 7,399 7,399
Multifamily — 733 733 — 53,642 53,642
Agriculture 8 11 19 66 7,522 7,588
Total real estate loans 890 6,563 7,453 15,072 731,655 746,727
Commercial loans 72 929 1,001 2,888 133,755 136,643
Consumer installment loans 4 103 107 30 5,301 5,331
All other loans — 5 5 — 1,279 1,279
Unallocated — �� 101 101 — — —
Total loans $ 966 $ 7,701 $ 8,667 $ 17,990 $ 871,990 $ 889,980

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

Table of Contents


	December 31, 2018
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	349	$	1,932	$	2,281	$	3,694	$	212,574	$	216,268
Commercial		482		1,328		1,810		5,052		374,852		379,904
Construction and land development		515		646		1,161		4,571		115,842		120,413
Second mortgages		—		20		20		—		6,778		6,778
Multifamily		—		371		371		2,559		56,998		59,557
Agriculture		—		17		17		—		8,370		8,370
Total real estate loans		1,346		4,314		5,660		15,876		775,414		791,290
Commercial loans		900		994		1,894		1,983		186,739		188,722
Consumer installment loans		—		152		152		—		12,048		12,048
All other loans		—		12		12		—		1,645		1,645
Unallocated		—		1,265		1,265		—		—		—
Total loans	$	2,246	$	6,737	$	8,983	$	17,859	$	975,846	$	993,705

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~~$14.9 million and ~~$15.8~~$17.4 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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~~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.

Table of Contents

The following tables present the composition of loans by credit quality indicator at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	217,189	$	3,523	$	1,291	$	—	$	222,003
Commercial		387,245		3,325		2,494		—		393,064
Construction and land development		130,156		415		406		—		130,977
Second mortgages		5,839		545		—		—		6,384
Multifamily		71,280		—		2,494		—		73,774
Agriculture		9,403		54		—		—		9,457
Total real estate loans		821,112		7,862		6,685		—		835,659
Commercial loans		180,282		1,811		3,906		—		185,999
Consumer installment loans		11,862		14		7		—		11,883
All other loans		981		—		—		—		981
Total loans	$	1,014,237	$	9,687	$	10,598	$	—	$	1,034,522

September 30, 2017
Pass Special
Mention Substandard Doubtful Total
Mortgage loans on real estate:
Residential 1-4 family $ 223,878 $ 3,638 $ 2,229 $ — $ 229,745
Commercial 337,645 3,102 5,012 — 345,759
Construction and land development 98,132 179 4,283 — 102,594
Second mortgages 7,292 107 — — 7,399
Multifamily 51,097 — 2,545 — 53,642
Agriculture 7,115 387 86 — 7,588
Total real estate loans 725,159 7,413 14,155 — 746,727
Commercial loans 133,173 769 2,701 — 136,643
Consumer installment loans 5,283 18 30 — 5,331
All other loans 1,279 — — — 1,279
Total loans $ 864,894 $ 8,200 $ 16,886 $ — $ 889,980


	December 31, 2016										December 31, 2018
	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
Residential 1‑4 family											$	211,832	$	3,179	$	1,257	$	—	$	216,268
Commercial		330,851		3,168		5,785		—		339,804		372,745		3,551		3,608		—		379,904
Construction and land development		92,556		234		5,492		—		98,282		115,650		192		4,571		—		120,413
Second mortgages		7,474		437		—		—		7,911		6,686		92		—		—		6,778
Multifamily		36,474		—		2,610		—		39,084		56,802		196		2,559		—		59,557
Agriculture		7,067		118		—		—		7,185		8,312		58		—		—		8,370
Total real estate loans		674,395		8,569		17,165		—		700,129		772,027		7,268		11,995		—		791,290
Commercial loans		122,129		5,879		1,292		—		129,300		184,004		1,798		2,920		—		188,722
Consumer installment loans		5,563		20		44		—		5,627		12,042		6		—		—		12,048
All other loans		1,243		—		—		—		1,243		1,645		—		—		—		1,645
Total loans	$	803,330	$	14,468	$	18,501	$	—	$	836,299	$	969,718	$	9,072	$	14,915	$	—	$	993,705

In accordance with FASB ~~ASU 2011-02,~~Accounting Standards Update (ASU) 2011‑02, Receivables (Topic 310): A ~~Creditor's~~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 2325 and 1724 loans that met the definition of a TDR ~~as of~~at September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

During the three months ended September 30, 2017, the Company modified two 1-4 family loans that were considered to be TDRs. The Company lowered the interest rate and extended the term for each of the 1-4 family loans, 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. 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~~and nine months ended September 30, ~~2016,~~2019. During the three months ended September 30, 2018, the Company modified one ~~residential 1-4 family loan and one consumer installment~~commercial real estate loan that ~~were~~was considered to be ~~TDRs.~~a TDR. The Company ~~extended~~restructured the ~~term~~terms for ~~the residential 1-4 family~~this loan, which had a pre- and post-modification balance of ~~$81,000~~$126,000. During the nine months ended September 30, 2018, the Company modified one multifamily loan and ~~$97,000, respectively. The Company extended the term and lowered the interest rate for the consumer installment~~one commercial real estate loan that were considered to be TDRs, which had a total pre- and post-modification balance of ~~$248,000.~~$2.6 million and $126,000, respectively. The Company restructured the terms for both loans.

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 the three months ended September 30, 2019. During the nine months ended September 30, 2019, one loan that had been restructured during the previous 12 months went into default. This multifamily real estate loan had a recorded investment of $2.6 million. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three and nine months ended September 30, ~~2017 and 2016.~~2018.

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,~~310‑10‑35, Receivables, Subsequent Measurement.

Table of Contents

At September 30, ~~2017,~~2019, the Company had ~~1-4~~1‑4 family mortgages in the amount of ~~$147.4~~$112.3 million pledged as collateral to the Federal Home Loan Bank ~~with~~for a ~~lendable collateral value~~total borrowing capacity of ~~$124.0~~$93.7 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,~~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.~~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~~1‑4 family, were analogized to meet the criteria of FASB ASC ~~310-30.~~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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the outstanding contractual balance of the PCI loans was ~~$73.8~~$55.2 million and ~~$81.1~~$62.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):


											September 30, 2019				December 31, 2018
	September 30, 2017					December 31, 2016							% of PCI				% of PCI
	Amount		% of PCI Loans			Amount		% of PCI Loans			Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1-4 family	$	40,746		89.65	%	$	46,623		89.72	%
Residential 1‑4 family											$	30,367	89.43	%	$	34,240	89.43	%
Commercial		559		1.23			649		1.25			700	2.06			746	1.95
Construction and land development		1,599		3.52			1,969		3.79			1,200	3.53			1,326	3.46
Second mortgages		2,289		5.04			2,453		4.72			1,457	4.29			1,729	4.52
Multifamily		258		0.56			270		0.52			234	0.69			244	0.64
Total real estate loans		45,451		100.00			51,964		100.00			33,958	100.00			38,285	100.00
Total PCI loans	$	45,451		100.00	%	$	51,964		100.00	%	$	33,958	100.00	%	$	38,285	100.00	%

There was no activity in the allowance for loan losses on PCI loans for the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~

2018.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019				December 31, 2018
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	30,367	$	156	$	34,240
Commercial		—		700		—		746
Construction and land development		—		1,200		—		1,326
Second mortgages		—		1,457		—		1,729
Multifamily		—		234		—		244
Total real estate loans		156		33,958		156		38,285
Total PCI loans	$	156	$	33,958	$	156	$	38,285

September 30, 2017 December 31, 2016
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
Commercial — 559 — 649
Construction and land development — 1,599 — 1,969
Second mortgages — 2,289 — 2,453
Multifamily — 258 — 270
Total real estate loans 200 45,451 200 51,964
Total PCI loans $ 200 $ 45,451 $ 200 $ 51,964

Table of Contents

The change in the accretable yield balance for the nine months ended September 30, ~~2017~~2019 and the year ended December 31, ~~2016,~~2018, 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, 2018	$	44,126
Accretion		(5,219)
Reclassification to nonaccretable difference		(800)
Balance, December 31, 2018	$	38,107
Accretion		(4,852)
Reclassification from nonaccretable difference		1,502
Balance, September 30, 2019	$	34,757

The PCI loans were not classified as nonperforming assets as of September 30, ~~2017,~~2019, 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 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019		December 31, 2018
Residential 1‑4 family	$	233	$	314
Commercial		—		15
Construction and land development		4,507		770
Total other real estate owned	$	4,740	$	1,099

September 30, 2017 December 31, 2016

Residential 1-4 family $ 383 $ 1,276
Commercial 15 643
Construction and land development 2,312 2,508
Total other real estate owned $ 2,710 $ 4,427

At September 30, ~~2017,~~2019, the Company had ~~$3.2 million~~$467,000 in residential ~~1-4~~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~~at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019		December 31, 2018

NOW	$	147,639	$	165,946
MMDA		130,263		126,933
Savings		96,388		92,910
Time deposits less than or equal to $250,000		483,745		485,155
Time deposits over $250,000		136,206		128,945
Total interest bearing deposits	$	994,241	$	999,889

September 30, 2017 December 31, 2016

NOW $ 137,559 $ 137,332
MMDA 144,409 111,346
Savings 91,642 90,340
Time deposits less than or equal to $250,000 440,607 440,699
Time deposits over $250,000 118,837 128,690
Total interest bearing deposits $ 933,054 $ 908,407

Table of Contents

Note 7. Accumulated Other Comprehensive Income (Loss)

The following tables present activity net of tax in accumulated other comprehensive income (loss) (AOCI) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (dollars in thousands):


	Three months ended September 30, 2019
							Accumulated
	Unrealized		Defined		Gain (Loss) on		Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	2,798	$	(857)	$	9	$	1,950
Other comprehensive income (loss) before reclassifications		948		—		(122)		826
Amounts reclassified from AOCI		(39)		—		—		(39)
Net current period other comprehensive income (loss)		909		—		(122)		787
Ending balance	$	3,707	$	(857)	$	(113)	$	2,737


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

Beginning balance	$	769		$	(756	)	$	(25	)	$	(12	)	$	(1,517)	$	(1,048)	$	302	$	(2,263)
Other comprehensive income (loss) before reclassifications		43			-			35			78			(968)		—		(27)		(995)
Amounts reclassified from AOCI		(31	)		-			-			(31	)		(53)		—		—		(53)
Net current period other comprehensive income (loss)		12			-			35			47			(1,021)		—		(27)		(1,048)
Ending balance	$	781		$	(756	)	$	10		$	35		$	(2,538)	$	(1,048)	$	275	$	(3,311)


													Nine months ended September 30, 2019
																			Accumulated
													Unrealized		Defined		Gain (Loss) on		Other
	Three months ended September 30, 2016												Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Unrealized Gain (Loss) on Securities			Defined Benefit Pension Plan			Gain (Loss) on Cash Flow Hedge			Total Other Comprehensive Income (Loss)			Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	3,530		$	(901	)	$	(578	)	$	2,051		$	(618)	$	(857)	$	196	$	(1,279)
Other comprehensive income (loss) before reclassifications		(322	)		-			189			(133	)		4,539		—		(309)		4,230
Amounts reclassified from AOCI		(58	)		-			-			(58	)		(214)		—		—		(214)
Net current period other comprehensive income (loss)		(380	)		-			189			(191	)		4,325		—		(309)		4,016
Ending balance	$	3,150		$	(901	)	$	(389	)	$	1,860		$	3,707	$	(857)	$	(113)	$	2,737


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

Beginning balance	$	(410	)	$	(767	)	$	(46	)	$	(1,223	)	$	954	$	(1,048)	$	137	$	43
Other comprehensive income (loss) before reclassifications		1,309			11			56			1,376			(3,428)		—		138		(3,290)
Amounts reclassified from AOCI		(118	)		-			-			(118	)		(64)		—		—		(64)
Net current period other comprehensive income (loss)		1,191			11			56			1,258			(3,492)		—		138		(3,354)
Ending balance	$	781		$	(756	)	$	10		$	35		$	(2,538)	$	(1,048)	$	275	$	(3,311)

Nine 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 $ 443 $ (901 ) $ (131 ) $ (589 )
Other comprehensive income (loss) before reclassifications 3,109 - (258 ) 2,851
Amounts reclassified from AOCI (402 ) - - (402 )
Net current period other comprehensive income (loss) 2,707 - (258 ) 2,449
Ending balance $ 3,150 $ (901 ) $ (389 ) $ 1,860

Table of Contents

The following ~~table presents~~tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (dollars in thousands):


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Three months ended
	September 30, 2019		September 30, 2018
Securities available for sale:
Unrealized gains on securities available for sale	$	(50)	$	(68)	Gain on securities transactions, net
Related tax expense		11		15	Income tax expense
	$	(39)	$	(53)	Net of tax

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


												Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income	Amount Reclassified from AOCI				Statement of Income
	Nine months ended							Nine months ended
	September 30, 2017			September 30, 2016				September 30, 2019		September 30, 2018
Securities available for sale:
Unrealized gains on securities available for sale	$	(180	)	$	(608	)	Gain on securities transactions, net	$	(274)	$	(82)	Gain on securities transactions, net
Related tax expense		62			206		Income tax expense		60		18	Income tax expense
	$	(118	)	$	(402	)	Net of tax	$	(214)	$	(64)	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 (an exit price) 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.

~~• 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 30, ~~2017.~~2019.

Table of Contents

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, 2019
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,957	$	—	$	7,957	$	—
U.S. Government agencies		22,955		—		22,955		—
State, county and municipal		94,670		—		94,670		—
Mortgage backed securities		47,794		—		47,794		—
Asset backed securities		10,708		—		10,708		—
Corporate bonds		6,075		—		6,075		—
Total investment securities available for sale		190,159		—		190,159		—
Cash flow hedge asset		15		—		15		—
Total assets at fair value	$	190,174	$	—	$	190,174	$	—
Cash flow hedge liability	$	157		—	$	157		—
Total liabilities at fair value	$	157	$	—	$	157	$	—

September 30, 2017
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 $ -
U.S. Gov’t sponsored agencies 2,743 - 2,743 -
State, county and municipal 124,329 250 124,079 -
Corporate and other bonds 15,022 - 15,022 -
Mortgage backed – U.S. Gov’t agencies 5,583 - 5,583 -
Mortgage backed – U.S. Gov’t sponsored agencies 16,383 1,597 14,786 -
Total investment securities available for sale $ 210,447 $ 4,568 $ 205,879 $ -
Cash flow hedge 17 - 17 -
Total assets at fair value $ 210,464 $ 4,568 $ 205,896 $ -
Total liabilities at fair value $ - $ - $ - $ -


	December 31, 2018
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	13,124	$	1,479	$	11,645	$	—
U.S. Government agencies		24,609		2,178		22,431		—
State, county and municipal		112,542		2,644		109,898		—
Mortgage backed securities		46,417		3,496		42,921		—
Asset backed securities		5,411		—		5,411		—
Corporate bonds		4,623		—		4,623		—
Total investment securities available for sale		206,726		9,797		196,929		—
Cash flow hedge asset		253		—		253		—
Total assets at fair value	$	206,979	$	9,797	$	197,182	$	—
Total liabilities at fair value	$	—	$	—	$	—	$	—

December 31, 2016
Total Level 1 Level 2 Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 57,976 $ 11,055 $ 46,921 $ -
U.S. Gov’t sponsored agencies 3,336 952 2,384 -
State, county and municipal 122,773 2,345 120,428 -
Corporate and other bonds 15,503 - 15,503 -
Mortgage backed – U.S. Gov’t agencies 3,495 - 3,495 -
Mortgage backed – U.S. Gov’t sponsored agencies 13,038 - 13,038 -
Total investment securities available for sale 216,121 14,352 201,769 -
Total assets at fair value $ 216,121 $ 14,352 $ 201,769 $ -
Cash flow hedge $ (70 ) $ - $ (70 ) $ -
Total liabilities at fair value $ (70 ) $ - $ (70 ) $ -

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). 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~~companies 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. 1618 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

Table of Contents

cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):


	September 30, 2019
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,142	$	—	$	—	$	3,142
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,740		—		—		4,740
Total assets at fair value	$	9,471	$	—	$	—	$	9,471
Total liabilities at fair value	$	—	$	—	$	—	$	—

September 30, 2017
Total Level 1 Level 2 Level 3
Impaired loans $ 11,408 $ — $ 4,511 $ 6,897
Other real estate owned 2,710 — 1,226 1,484
Total assets at fair value $ 14,118 $ — $ 5,737 $ 8,381
Total liabilities at fair value $ — $ — $ — $ —


	December 31, 2016								December 31, 2018
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Impaired loans	$	9,536	$	—	$	2,168	$	7,368	$	9,343	$	—	$	—	$	9,343
Loans held for sale										146		—		146		—
Bank premises and equipment held for sale										1,252		—		—		1,252
Other real estate owned		4,427		—		3,408		1,019		1,099		—		—		1,099
Total assets at fair value	$	13,963	$	—	$	5,576	$	8,387	$	11,840	$	—	$	146	$	11,694
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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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~~and deemed to be stale or 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 without further adjustment for unobservable inputs, 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.

Table of Contents

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

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

Other real estate owned

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

Fair Value of Financial Instruments

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

Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

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, 2019
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	38,213	$	39,131	$	—	$	39,131	$	—
Loans, net of allowance		1,026,129		1,026,129		—		—		1,026,129
PCI loans, net of allowance		33,802		40,717		—		—		40,717

Financial liabilities:
Interest bearing deposits		994,241		995,189		—		995,189		—
Borrowings		77,791		77,760		—		77,760		—

September 30, 2017
Carrying Value
Estimated Fair
Value
Level 1 Level 2 Level 3
Financial assets:
Securities held to maturity $ 46,460 $ 47,325 $ — $ 47,325 $ —
Loans, net of allowance 881,313 882,433 — 875,536 6,897
PCI loans, net of allowance 45,251 52,219 — — 52,219

Financial liabilities:
Interest bearing deposits 933,054 933,819 — 933,819 —
Long-term borrowings 85,420 85,343 — 85,343 —

Table of Contents


	December 31, 2018
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	42,108	$	42,253	$	—	$	42,253	$	—
Loans, net of allowance		984,722		978,778		—		—		978,778
PCI loans, net of allowance		38,129		42,674		—		—		42,674

Financial liabilities:
Interest bearing deposits		999,889		997,714		—		997,714		—
Borrowings		63,571		63,393		—		63,393		—

December 31, 2016
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 $ —
Loans, net of allowance 826,806 829,349 — 821,981 7,368
PCI loans, net of allowance 51,764 57,100 — — 57,100

Financial liabilities:
Interest bearing deposits 908,407 909,627 — 909,627 —
Long-term borrowings 87,681 87,611 — 87,611 —

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).~~

~~Securities held to maturity~~

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

~~Restricted securities~~

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

~~Loans~~

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

~~PCI loans~~

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

~~Accrued interest receivable~~

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

~~Financial Liabilities~~

~~Noninterest bearing deposits~~

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

~~Interest bearing deposits~~

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

~~Federal funds purchased~~

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

~~Long-term borrowings~~

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

~~Accrued interest payable~~

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

~~Off-balance sheet financial instruments~~

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

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

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

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 months ended September 30, ~~2017~~2019 and ~~2016~~2018 (dollars and shares in thousands, except per share data):

	Net Income (Numerator)		Weighted Average Common Shares (Denominator)		Per Common Share Amount
For the three months ended September 30, 2017
									Weighted Average
							Net Income		Shares	Per
							(Numerator)		(Denominator)	Share Amount
For the three months September 30, 2019
Basic EPS	$	2,416		22,041	$	0.11	$	4,613	22,303	$	0.21
Effect of dilutive stock awards		—		501		—		—	258		(0.01)
Diluted EPS	$	2,416		22,542	$	0.11	$	4,613	22,561	$	0.20

For the three months ended September 30, 2016
For the three months ended September 30, 2018
Basic EPS	$	2,458		21,935	$	0.11	$	3,955	22,115	$	0.18
Effect of dilutive stock awards		—		192		—		—	512		(0.01)
Diluted EPS	$	2,458		22,127	$	0.11	$	3,955	22,627	$	0.17

For the nine months ended September 30, 2017
For the nine months ended September 30, 2019
Basic EPS	$	7,843		22,000	$	0.36	$	11,660	22,224	$	0.52
Effect of dilutive stock awards		—		491		—		—	251		—
Diluted EPS	$	7,843		22,491	$	0.35	$	11,660	22,475	$	0.52

For the nine months ended September 30, 2016
For the nine months ended September 30, 2018
Basic EPS	$	7,196		21,902	$	0.33	$	10,331	22,095	$	0.47
Effect of dilutive stock awards		—		203		—		—	481		(0.01)
Diluted EPS	$	7,196		22,105	$	0.33	$	10,331	22,576	$	0.46

Antidilutive shares issuable under awards or options of 253,000 were excluded from the computation of diluted earnings per common share for each of the three and nine months ended September 30, 2019. There were no antidilutive exclusions from the computation of diluted earnings per ~~common~~ share for the three and nine months ended September 30, ~~2017 and 2016.~~2018.

Table of Contents

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~~froze 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 months ended September 30, ~~2017~~2019 and ~~2016~~2018 (dollars in thousands):

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 months ended September 30, 2019 and 2018 (dollars in thousands):
	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest cost	$	41	$	39	$	122	$	117
Expected return on plan assets		(53)		(59)		(159)		(177)
Amortization of prior service cost		1		1		3		3
Recognized net loss due to settlement		40		—		93		—
Recognized net actuarial loss		12		15		36		45
Net periodic benefit expense (income)	$	41	$	(4)	$	95	$	(12)

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Interest cost $ 39 $ 47 $ 117 $ 142
Expected return on plan assets (70 ) (81 ) (210 ) (244 )
Amortization of prior service cost 1 1 3 3
Recognized net loss due to settlement — 13 — 39
Recognized net actuarial loss 12 91 36 163
Net periodic benefit cost $ (18 ) $ 71 $ (54 ) $ 103

~~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.

Note 11. Cash Flow Hedge

~~On November 7, 2014, the~~The Company ~~entered into an interest~~designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate ~~swap~~borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had cash flow hedges with a total notional ~~amount~~amounts of $40 million and $30 ~~million.~~million at September 30, 2019 and December 31, 2018, respectively. 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~~swaps were entered into with a counterparty that met the Company’s credit standards, and the ~~agreement contains~~agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the ~~contract~~contracts is not significant. The Company had ~~$390,000~~collateral pledged of ~~cash pledged as collateral for each of the periods ended~~$180,000 and $0 at September 30, ~~2017~~2019 and December 31, ~~2016.~~2018, 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~~swaps as a cash flow ~~hedge,~~hedges, 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 highly effective for the three and nine month periods ended September 30, 2019 and 2018. The Company recorded a fair value asset of $15,000 and a fair value liability of $157,000 in other assets and other liabilities, respectively, at September 30, 2019. The Company recorded a fair value asset of $253,000 in other assets at December 31, 2018. The net gain (loss) was recorded as a component of other comprehensive income (loss) net of associated tax effects.

Note 12. Revenue Recognition

The Company recognizes income in accordance with FASB ASU 2014‑09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. 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 this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Table of Contents

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.

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 nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018 (dollars in thousands):


	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts	$	486	$	411	$	1,341	$	1,192
Interchange and ATM fees		271		215		732		626
Brokerage fees and commissions		67		76		262		272
Noninterest income (in-scope of Topic 606)		824		702		2,335		2,090
Noninterest income (out-of-scope of Topic 606)		687		509		1,641		1,289
Total noninterest income	$	1,511	$	1,211	$	3,976	$	3,379

Note 13. Leases

On January 1, 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises. The ~~fair~~guidance was implemented using the modified retrospective transition approach at the date of adoption with no cumulative effect adjustment to opening retained earnings and no material impact on the measurement of operating lease costs. Prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting policies, resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The Company elected the practical expedient package, which allowed it to not reassess (1) whether expired or existing contracts are or contain a lease, (2) the lease classification of expired or existing leases, and (3) the initial direct costs for any existing leases. The Company also elected the practical expedient to use hindsight in determining the lease term for existing leases, thereby including renewal options that the Company is reasonably certain will be exercised in the lease term. The adoption of this ASU resulted in the recognition of operating lease assets of $7.4 million and lease liabilities of $7.6 million at January 1, 2019.

Table of Contents

The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed. None of the Company’s ~~cash flow hedge was an unrealized gain~~current leases contain variable lease payment terms. The Company accounts for associated non-lease components separately.

The following table presents operating lease liabilities as of ~~$17,000~~September 30, 2019 (dollars in thousands):


	Operating Leases

Gross lease liability	$	9,583
Less: imputed interest		(2,616)
Present value of lease liability	$	6,967

The weighted average remaining lease term and weighted average discount rate for operating leases at September 30, ~~2017,~~2019 was 12.0 years and ~~was recorded in other assets. The fair value~~4.59%, respectively. Maturities of the ~~Company’s cash flow hedge was an unrealized loss of $70,000~~gross operating lease liability at ~~December 31, 2016, and was recorded~~September 30, 2019 are as follows (dollars in ~~other liabilities. The gain and loss were recorded as a component of other comprehensive income net of associated tax effects.~~

thousands):


2019	$	305
2020		1,231
2021		1,191
2022		600
2023		630
Thereafter		5,626
Total of future payments	$	9,583

Operating lease costs and sublease rental income for the three months ended September 30, 2019 were $318,000 and $63,000, respectively. Rental expense and sublease rental income under operating lease agreements for the three months ended September 30, 2018 were $319,000 and $27,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2019 were $1.1 million and $129,000, respectively. Rental expense and sublease rental income under operating lease agreements for the nine months ended September 30, 2018 were $1.0 million and $81,000, respectively. Included in operating lease costs was $138,000 for the nine months period ended September 30, 2019, related to the early termination of an unprofitable branch recognized on June 30, 2019.

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 30, ~~2017~~2019 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, ~~2017~~2019 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~~10‑K for the year ended December 31, ~~2016.~~2018.

OVERVIEW

offices.

Table of Contents

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.

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;

Table of Contents

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

consumer profiles and spending and savings habits;

levels of fraud in the banking industry;

the level of attempted cyber attacks in the banking industry;

the securities and credit markets;

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

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

inflation;

technology; and

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016~~2018 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.

Allowance for Loan Losses on Loans

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

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and

Table of Contents

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~~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~~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.

Table of Contents

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.

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,~~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~~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.

Table of Contents

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.~~recorded. 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.

~~Income Taxes~~

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

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties during the three and nine months ended September 30, 2017 and 2016. 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.

The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax. All years from 2013 through 2016 are open to examination by the respective tax authorities.

RESULTS OF OPERATIONS

Overview

Net income ~~was $2.4~~of $4.6 million for the third quarter of ~~2017,~~2019 was an increase of $658,000, or 16.6%, compared with net income of ~~$2.5~~$4.0 million for the third quarter of 2018. Interest and dividend income increased by $2.3 million in the third quarter of ~~2016.~~2019 compared with the same period in 2018, driven by interest and fees on loans, which increased $1.3 million, and interest and fees on PCI loans, which increased $1.1 million. Noninterest income increased by $300,000 year over year. Offsetting these increases was an increase of $939,000 in noninterest expenses, an increase of $877,000 in interest expense and an increase of $142,000 in income tax expense.

Two separate items of note occurred during the quarter. First, a $1.1 million payoff of a loan within the PCI portfolio was received. The PCI portfolio contains six separate pools, two of which, due to the uncertain nature of the cash flows, have no carrying value. This $1.1 million payoff was recorded in one of those pools, the Acquisition, Development and Construction (ADC) pool, resulting in the entire payment being interest income. The other item was the migration of a $4.0 million nonperforming loan, charged down by $200,000 and moved into the OREO category at $3.8 million. As a part of this transaction, the Bank paid delinquent real estate taxes in the amount of $624,000 on this property, all of which was expensed in other real estate expense, net in the current quarter.

Net income was $11.7 million for the first nine months of 2019 compared with $10.3 million for the same period in 2018. This is an increase of $1.3 million, or 12.9%. Interest and dividend income increased by $5.4 million, or 12.4%, and noninterest income increased by $597,000, or 17.7%. Offsetting these increases to net income were increases of $3.0 million in interest expense, $1.2 million in noninterest expense, $125,000 in provision for loan losses and $376,000 in income tax expense. Earnings per common share, basic and fully diluted, were ~~$0.11 per share for each of the three months ended September 30, 2017 and 2016.~~

~~Net income was $7.8 million~~$0.52 for the first nine months ~~ended September 30, 2017 versus net income~~ of ~~$7.2 million~~2019 compared with $0.47, basic, and $0.46, fully diluted, for the ~~same period in 2016. Basic earnings per common share were $0.36 per share and $0.33 per share for the~~first nine months ~~ended September 30, 2017 and 2016, respectively. Fully diluted earnings per common share were $0.35 per share and $0.33 per share for the nine months ended September 30, 2017 and 2016, respectively.~~of 2018.

Net Interest Income

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

Net interest income increased ~~$523,000,~~$1.4 million, or ~~5.0%~~12.0%, from the third quarter of ~~2016~~2018 to the third quarter of 2017 and was $11.0 million. The yield on earning assets of 4.51% in the third quarter of 2017 was a slight increase from 4.50% in the third quarter of 2016. Yield on loans increased from 4.54% to 4.62%, and volume considerations increased the average balance by $68.5 million, or 8.5%. Interest income on loans was $10.1 million, an increase of $971,000 over third quarter 20162019. Net interest income ~~of $9.2 million. Interest on PCI loans~~ was ~~$1.4~~$13.4 million in the third quarter of ~~2017, a decrease of $126,000~~2019 compared with $12.0 million for the same period in 2018. Interest and fees on loans increased by $1.3 million, or 10.9%, year over ~~year. The return~~year, and was $13.2 million for the third quarter of 2019. Interest and fees on PCI loans of $2.3 million is an increase of $1.1 million, driven by the $1.1 million ADC payment. The average balance of loans, excluding PCI loans, was $965.8 million for the third quarter of 2018 and increased

Table of Contents

by $71.7 million, or 7.4%, in the third quarter of 2019. The yield on loans also increased, year over ~~this time frame, from 11.32%~~year, and was 4.89% in the third quarter of 2018 and increased by 15 basis points to ~~11.76%. Income~~5.04% in the third quarter of 2019.

Interest income on securities of $1.8 million was a year-over-year decrease of $48,000. Interest income on securities, on a tax-equivalent basis, was $1.9 million in the third quarter of ~~2017 represented an increase~~2019, which was a decrease of ~~$93,000 year over year as a result~~$95,000 compared with the third quarter of ~~an increase of $15.2 million in the~~2018. This decrease was driven both by average balance and yield. The average balance of ~~securities. The~~the securities portfolio decreased $8.7 million year over year. Additionally, on a tax-equivalent basis, the yield on investment securities decreased four basis points and was ~~3.10%~~3.25% in the third quarter of ~~each~~2019 and 3.21% in the third quarter of ~~2017 and 2016.~~2018.

Interest expense increased ~~$459,000,~~$877,000, or ~~24.1%~~27.7%, when comparing the third quarter of ~~2017~~2019 and the third quarter of ~~2016.~~2018. Interest expense on deposits increased ~~$503,000,~~$999,000, or ~~32.5%~~37.0%, as the average balance of interest bearing deposits increased ~~$103.4~~$39.9 million, or ~~12.4%~~4.1%. The increase in deposit cost was driven by an increase in time deposit average balances, which increased $39.2 million, or 6.6%, year over year. The cost of time deposits increased from 1.56% to 2.06%, which resulted in an increase in the cost of total interest bearing deposits from 1.10% to 1.45%, over the same time frame. FHLB and other borrowings decreased, on average, $28.7 million year over year, and there was a slight increase in the rate paid, from 1.98% in the third quarter of 2018 to 1.99% in the third quarter of 2019. Overall, the Bank’s cost of interest bearing liabilities increased 31 basis points, from ~~0.79%~~1.18% in the third quarter of ~~2016~~2018 to ~~0.92%~~1.49% in the third quarter of ~~2017. While average~~2019.

The tax-equivalent net interest ~~bearing deposit costs~~margin increased 25 basis points, from ~~0.74%~~3.77% in the third quarter of ~~2016~~2018 to ~~0.87%~~4.02% in the third quarter of 2017, there was a decline of $34.1 million 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 third 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.

~~The tax equivalent net interest margin decreased 8 basis points, from 3.82% in the third quarter of 2016 to 3.74% in the third quarter of 2017.~~2019. Likewise, the interest spread ~~decreased~~increased from ~~3.71%~~3.58% to ~~3.59%~~3.74% over the same time period. The ~~decrease~~increase in the margin was precipitated by the increase of $2.4 million in loan income, including the PCI loan payoff, and from an increase in the average balances in noninterest bearing deposits of $24.0 million and shareholders’ equity of $19.7 million.

Net interest income was $37.5 million for the first nine months of 2019, an increase of ~~16.5%~~$2.5 million, or 7.0%, when comparing the first nine months of 2018 and 2019. The yield on earning assets was 5.02% for the first nine months of 2019 compared with 4.67% for the first nine months of 2018. Interest and fees on loans of $38.2 million in the ~~cost~~first nine months of ~~interest bearing labilities.~~

2019 was an increase of $4.1 million compared with $34.1 million for the same period in 2018. Interest and fees on PCI loans, including the $1.1 million ADC payment noted above, increased $940,000 over this same time frame. For the first nine months of ~~2017, net interest~~2019 compared with the same period in 2018, securities income increased ~~$2.0~~$265,000. On a tax-equivalent basis the increase was $158,000. The average balance of tax-exempt securities declined $18.8 million, ~~or 6.5%, and was $32.9 million.~~thus reducing the benefit received on a tax-equivalent basis on these securities. The tax-equivalent yield on ~~earning assets~~the portfolio increased and was ~~4.55%~~3.17% for the first nine months of ~~2017~~2019 compared with ~~4.52% for the first nine months of 2016. Interest and fees on loans of $29.7 million was an increase of $3.1 million compared with $26.6 million~~3.10% for the same period in 2016. Interest and fees on PCI loans declined $349,000 over this same time frame. Securities income increased $156,000 for the first nine months of 2017 compared with the same period in 2016. The tax-equivalent yield on the securities portfolio was 3.14% for the first nine months of 2017 compared with 3.11% for the same time frame in 2016.2018.

Interest expense of ~~$6.7~~$11.6 million represented an increase of ~~$961,000,~~$3.0 million, or ~~16.8%~~34.6%, in the first nine months of ~~2017~~2019 compared with the same period in ~~2016. Total average~~2018. Average interest bearing liabilities increased ~~6.2%, or $58.7 million, as loan growth has also been funded by an increase of $21.1~~$19.0 million, or ~~18.9%, in the average balance noninterest~~1.8%. The cost of interest bearing ~~deposits.~~

~~The tax equivalent net interest margin was 3.80%~~liabilities increased from 1.09% for the first nine months of ~~2017 compared with 3.82%~~2018 to 1.44% for the first nine months of ~~2016. The net interest spread~~2019. Driving the increase was ~~3.66%~~growth of $65.5 million, or 11.5%, in the average balance of time deposits, from $569.0 million for the first nine months of ~~2017 versus 3.72%~~2018 to $634.4 million for the same period in 2019. This growth in time deposits, as a result of higher rates, came partly from a shift away from savings and money market accounts, which experienced a decline of $13.2 million in average balances between the comparison periods. Additionally, time deposit growth included a shift out of FHLB and other borrowings, which reflected an average balance decline of $35.0 million, or 35.2%, over the two nine-month comparison periods.

The tax-equivalent net interest margin was 3.84% for the first nine months of ~~2016.~~2019 compared with 3.76% for the first nine months of 2018. The yield on earning assets increased by 35 basis points over this time frame to 5.02%. The competition for funding, however, pushed the cost of interest bearing liabilities up an equal amount, 35 basis points, from 1.09% to 1.44%. The net interest spread was 3.58% for the first nine months of each of 2018 and 2019. The net interest margin of 3.84% for the first nine months of 2019 is an increase from 3.76% for the first nine months of 2018. The net interest margin has been enhanced by growth in the average balance of noninterest bearing deposits of $18.2 million, or 11.9%, and in shareholders’ equity of $17.6 million, or 13.8%. Excluding the $1.1 million ADC loan payment, the yield on the PCI portfolio would have been 13.72%, the yield on earning assets would have been 4.91%, the interest spread would have been 3.47% and the net interest margin would have been 3.73%.

Table of Contents

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 months ended September 30, ~~2017~~2019 and ~~2016.~~2018. 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)~~


	Three months ended September 30, 2019						Three months ended September 30, 2018
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,037,433	$	13,187	5.04	%	$	965,763	$	11,893	4.89	%
PCI loans		34,999		2,333	26.07			39,614		1,265	12.49
Total loans		1,072,432		15,520	5.74			1,005,377		13,158	5.19
Interest bearing bank balances		13,454		87	2.58			15,244		94	2.45
Federal funds sold		1,795		9	2.08			91		—	1.92
Securities (taxable)		195,401		1,489	3.05			179,738		1,364	3.04
Securities (tax exempt) (1)		49,616		450	3.63			73,985		669	3.62
Total earning assets		1,332,698		17,555	5.23			1,274,435		15,285	4.76
Allowance for loan losses		(8,872)						(9,219)
Non-earning assets		101,129						94,804
Total assets	$	1,424,955					$	1,360,020

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	155,208		85	0.22		$	153,794		81	0.21
Savings and money market		224,401		330	0.58			225,100		278	0.49
Time deposits		632,625		3,283	2.06			593,450		2,340	1.56
Total interest bearing deposits		1,012,234		3,698	1.45			972,344		2,699	1.10
Short-term borrowings		4,409		28	2.53			2,163		13	2.32
FHLB and other borrowings		62,079		315	1.99			90,761		452	1.98
Total interest bearing liabilities		1,078,722		4,041	1.49			1,065,268		3,164	1.18
Noninterest bearing deposits		181,249						157,252
Other liabilities		14,246						6,509
Total liabilities		1,274,217						1,229,029
Shareholders’ equity		150,738						130,991

Total liabilities and shareholders’ equity	$	1,424,955					$	1,360,020
Net interest earnings			$	13,514					$	12,121
Interest spread					3.74	%					3.58	%
Net interest margin					4.02	%					3.77	%

Tax equivalent adjustment:
Securities			$	95					$	141

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%.

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

Table of Contents


	Nine months ended September 30, 2019						Nine months ended September 30, 2018
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,016,041	$	38,246	5.03	%	$	956,109	$	34,122	4.77	%
PCI loans		36,321		4,877	17.70			41,366		3,937	12.55
Total loans		1,052,362		43,123	5.48			997,475		38,059	5.10
Interest bearing bank balances		15,752		300	2.55			13,063		203	2.08
Federal funds sold		890		14	2.17			79		1	1.80
Securities (taxable)		190,433		4,483	3.14			177,039		3,816	2.87
Securities (tax exempt) (1)		58,577		1,585	3.61			77,370		2,094	3.61
Total earning assets		1,318,014		49,505	5.02			1,265,026		44,173	4.67
Allowance for loan losses		(8,925)						(9,222)
Non-earning assets		100,221						91,994
Total assets	$	1,409,310					$	1,347,798

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	156,335		258	0.22		$	155,494		237	0.20
Savings and money market		220,868		930	0.56			234,091		904	0.52
Time deposits		634,434		9,333	1.97			568,983		6,056	1.42
Total interest bearing deposits		1,011,637		10,521	1.39			958,568		7,197	1.00
Short-term borrowings		4,072		84	2.77			3,091		50	2.17
FHLB and other borrowings		64,686		1,023	2.09			99,773		1,392	1.84
Total interest bearing liabilities		1,080,395		11,628	1.44			1,061,432		8,639	1.09
Noninterest bearing deposits		170,919						152,740
Other liabilities		12,809						5,992
Total liabilities		1,264,123						1,220,164
Shareholders’ equity		145,187						127,634

Total liabilities and shareholders’ equity	$	1,409,310					$	1,347,798
Net interest earnings			$	37,877					$	35,534
Interest spread					3.58	%					3.58	%
Net interest margin					3.84	%					3.76	%

Tax equivalent adjustment:
Securities			$	333					$	440

⁽¹⁾

Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

~~NET INTEREST MARGIN ANALYSIS~~

~~AVERAGE BALANCE SHEETS~~

~~(Dollars in thousands)~~

Nine months ended September 30, 2017 Nine 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 $ 856,465 $ 29,676 4.63 % $ 776,491 $ 26,582 4.56 %
Purchased credit impaired (PCI) loans 49,117 4,355 11.69 55,974 4,704 11.20
Total loans 905,582 34,031 5.02 832,465 31,286 5.01
Interest bearing bank balances 15,597 143 1.22 11,065 66 0.80
Federal funds sold 97 1 1.08 5 - 0.50
Securities (taxable) 182,724 3,577 2.61 178,700 3,528 2.63
Securities (tax exempt)⁽¹⁾ 85,607 2,735 4.26 82,750 2,573 4.15
Total earning assets 1,189,607 40,487 4.55 1,104,985 37,453 4.52
Allowance for loan losses (9,647 ) (9,985 )
Non-earning assets 89,261 84,712
Total assets $ 1,269,221 $ 1,179,712

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 253,638 579 0.31 $ 233,186 481 0.27
Savings 91,473 181 0.27 84,661 176 0.28
Time deposits 580,346 5,016 1.16 520,306 3,981 1.02
Total deposits 925,457 5,776 0.83 838,153 4,638 0.74
Short-term borrowings 994 9 1.21 2,313 14 0.85
FHLB and other borrowings 84,072 905 1.44 106,571 903 1.13
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
Noninterest bearing deposits 132,868 111,751
Other liabilities 5,487 5,297
Total liabilities 1,148,878 1,068,856
Shareholders' equity 120,343 110,856

Total liabilities and shareholders' equity $ 1,269,221 $ 1,179,712
Net interest earnings $ 33,797 $ 31,724
Interest spread 3.66 % 3.72 %
Net interest margin 3.80 % 3.82 %

Tax equivalent adjustment:
Securities $ 930 $ 875

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

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.

Table of Contents

The Company ~~recorded~~records a ~~$150,000~~separate provision for loan losses ~~during~~for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was no provision for loan losses on the loan portfolio, excluding PCI loans, for the three ~~and nine months~~month periods ended September 30, ~~2017.~~2019 and 2018. There was a provision for loan losses of $125,000 on the loan portfolio, excluding PCI loans, for the nine month period ended September 30, 2019 compared with no provision for loan losses for the same period of 2018. The provision recognized during the second quarter of 2019 was due to loan growth of $26.3 million, or 2.6%, during the quarter and an uptick in delinquencies less than 90 days past due and still accruing interest. There was no provision for loan losses on the PCI loan portfolio ~~during the three and nine months ended September 30, 2017 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~~month periods 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. 2019 or 2018. Additional discussion of loan quality is presented below.

~~There were~~The loan portfolio, excluding PCI loans, had net charge-offs of ~~$972,000~~$426,000 in the third quarter of ~~2017,~~2019, compared with net charge-offs of ~~$204,000~~$96,000 in the third quarter of ~~2016.~~2018. Total charge-offs were ~~$1.1 million~~$576,000 for the third quarter of ~~2017~~2019 compared with ~~$248,000~~$190,000 in the third quarter of ~~2016.~~2018. Recoveries of previously charged-off loans were ~~$89,000~~$150,000 for the third quarter of ~~2017~~2019 compared with ~~$44,000~~$94,000 in the third quarter of ~~2016.~~2018.

~~There were net charge-offs of $976,000 for~~For the nine months ended September 30, ~~2017,~~2019, the loan portfolio, excluding PCI loans, had net charge-offs of $715,000 compared with net ~~charge-offs~~recoveries of ~~$529,000 for~~$24,000 in the ~~nine months ended September 30, 2016.~~same time period of 2018. Total charge-offs were ~~$1.4~~$1.3 million for the nine months ended September 30, ~~2017~~2019 compared with ~~$801,000~~$394,000 in the same period of 2018. Recoveries of previously charged-off loans were $541,000 for the nine months ended September 30, ~~2016. Recoveries of previously charged-off loans were $380,000 for the nine months ended September 30, 2017~~2019 compared with ~~$272,000 for~~$418,000 in the ~~nine months ended September 30, 2016.~~

~~Noninterest Income~~

same period of 2018.

Noninterest Income

Noninterest income ~~decreased $180,000,~~increased $300,000, or ~~13.4%~~24.8%, ~~from the third quarter of 2016 to the third quarter of 2017. Mortgage loan income decreased $193,000. Gains on securities transactions were $48,000~~and was $1.5 million in the third quarter of ~~2017, as~~2019 compared with ~~$88,000~~$1.2 million in the third quarter of ~~2016, a decrease~~2018. Other noninterest income increased by $175,000, driven by life insurance proceeds of ~~$40,000. Offsetting these decreases~~$120,000, equity investment dividends of $45,000 and swap fee income of $35,000. Service charges and fees were $758,000 in the third quarter of 2019 and increased $132,000 year over year. Mortgage loan income of $176,000 in the third quarter of 2019 was an increase of ~~$61,000~~$79,000 over the same period in ~~service charge income.~~2018. Gain on sale of loans declined $65,000 in the third quarter of 2019 compared with the same period in 2018, and gain(loss) on securities transactions, net declined from $68,000 in the third quarter of 2018 to $50,000 in the same period in 2019.

Noninterest income was ~~$3.5~~$4.0 million for the first nine months of ~~2017~~2019, an increase of $597,000, or 17.7%, compared with ~~$4.1~~$3.4 million for the first nine months of ~~2016, a decrease of $555,000, or 13.7%. Mortgage loan income decreased $436,000, from $599,000~~2018. Service charges and fees, driven by an increase in the first nine months of 2016 to $163,000 for the same period in 2017. The Company discontinued a wholesale mortgage operation at the end of the third quarter of 2016 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. Securitiesdeposits, 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 decreases for the first nine months of 2017 compared with the same period in 2016 were increases of $226,000 in service charges on deposit accounts, $74,000 in income on bank owned life insurance and $9,000 in other noninterest income.

~~Noninterest Expense~~

Noninterest expenses increased $428,000, or 5.2%, when comparing the third quarter of 2017 to the same period in 2016. Other operating expenses increased $325,000. 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 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 compared with the same period in 2016 are primarily a reflection of the branch expansion activity that has occurred in 2016 and 2017, credit expenses also increased $190,000 year over year.

~~Noninterest expenses were $25.7~~$2.1 million for the first nine months of ~~2017,~~2019, an increase of $256,000 compared with the same period in 2018. Other noninterest income was $744,000 for the first nine months of 2019, an increase of $222,000 versus the first nine months of 2018. The 2019 period benefited from the receipt of life insurance proceeds of $120,000, dividends on an equity investment of $45,000 and swap fee income of $35,000. Gain on securities transactions increased $192,000 and was $274,000 for the first nine months of 2019 compared with $82,000 for the same period in 2018. Mortgage loan income of $338,000, driven by low interest rates and refinance activity, increased by $50,000 in the first nine months of 2019 compared with the same period in 2018. Gain on sale of loans declined by $118,000 in the first nine months of 2019 compared with the same period in 2018.

Noninterest Expense

Noninterest expenses were $9.2 million in the third quarter of 2019 and increased $939,000, or 11.3%, compared with the same period in 2018. Other real estate expenses, net increased by the largest dollar amount, $502,000, and were $565,000 for the third quarter of 2019 compared with $63,000 for the third quarter of 2018. Salaries and employee benefits increased by $260,000, or 5.2%, and were $5.3 million for the third quarter of 2019. Other operating expenses increased by $212,000 year over year and were $1.6 million in the third quarter of 2019. Data processing fees of $594,000 in the third quarter of 2019 were $112,000 greater than one year earlier. Offsetting these increases was a reduction in the FDIC assessment of $191,000 year over year due to the FDIC’s small bank assessment credit of $168,000 received in the third quarter of 2019.

Noninterest expenses were $27.1 million for the first nine months of 2019, as compared with ~~$24.5~~$25.8 million for the same period in ~~2016.~~2018. This is an increase of $1.2 million, or 4.7%. ~~Salaries~~Other real estate expenses, net increased $504,000, and ~~employee benefits increased $718,000, or 5.2%, in~~were $662,000 for the first nine months of ~~2017~~2019, compared with $158,000 for the same period in 2018. The major cause

Table of Contents

for the increase was the payment of $624,000 in past due taxes noted above. Expense in 2019 has been reduced by gain on sale of other properties. Occupancy expenses increased $301,000, or 12.7%. Data processing fees increased $274,000, or 18.7% and were $1.7 million for the first nine months of 2019. Other operating expenses increased $247,000 and were $4.6 million for the first nine months of 2019. Equipment expenses increased by $128,000 and were $1.2 million for the first nine months of 2019. Offsetting these increases, the FDIC assessment decreased $283,000 for the first nine months of 2019 compared with the same period in ~~2016. Other operating expenses increased $366,000 over~~2018 due to premium rate decreases and the comparison period. Occupancy expenses increased $286,000, data processing fees increased $236,000, other real estate expenses increased $187,000 and equipment expenses increased $120,000. Offsetting these increases were decreases in amortization of intangibles, which declined $552,000, and FDICsmall bank 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 period in 2017.credit mentioned above.

Income Taxes

Income tax expense was ~~$919,000~~$1.1 million for the three months ended September 30, ~~2017~~2019, compared with an income tax expense of ~~$862,000~~$945,000 for the third quarter of ~~2016. The effective tax rate was 27.6% for the third quarter of 2017 compared with 26.0% for the third quarter of 2016~~.2018. For the nine months ended September 30, ~~2017, income tax expense of $2.7 million represented an effective tax rate of 25.5%. For the nine months ended September 30, 2016,~~2019, income tax expense was $2.7 million ~~or an~~compared with $2.3 million for the first nine months of 2018. The effective tax rate for the third quarter of ~~27.5%~~2019 was 19.1% versus 19.3% in the third quarter of 2018. For the first nine months of 2019, the effective tax rate was 18.7% and, for the same period in 2018, it was 18.2%. The ~~lower~~increase in the effective tax rate ~~in 2017~~ was primarily ~~the result of the exercise of stock options by employees, which reduced~~from lower tax-exempt income ~~tax expense, as required by a recently adopted GAAP standard.~~

~~FINANCIAL CONDITION~~from municipal securities.

~~General~~FINANCIAL CONDITION

General

Total assets increased ~~$44.3~~$29.5 million, or ~~3.5%~~2.1%, during the first nine months of 2019 to ~~$1.294~~$1.423 billion at September 30, ~~2017 as compared with $1.250~~2019. Total loans, excluding PCI loans, were $1.035 billion at ~~December 31, 2016.~~September 30, 2019, increasing $40.8 million, or 4.1%, from year end 2018. Total PCI loans were ~~$890.0~~$34.0 million at September 30, ~~2017, increasing $53.7~~2019 versus $38.3 million ~~or 6.4%, from~~at year end ~~2016. Total PCI loans were $45.5 million at September 30, 2017 versus $52.0 million at December 31, 2016.~~2018.

During the first nine months of ~~2017, residential 1-4 family~~2019, loans, excluding PCI loans, grew ~~$21.9~~by $40.8 million, or ~~10.5%~~4.1%. ~~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~~$14.2 million, or ~~37.2%, commercial~~23.9%. Commercial mortgage loans grew ~~$7.3~~$13.2 million, or ~~5.7%, commercial mortgage loans on real estate grew $6.0 million, or 1.8%, and construction~~3.5%. Construction and land development loans grew ~~$4.3~~$10.6 million, or ~~4.4%~~8.8%. Residential 1 – 4 family loans grew $5.7 million, or 2.7%. Offsetting these increases was a decline in commercial loans of $2.7 million, or 1.4%.

The Company’s securities portfolio, excluding restricted equity securities, ~~declined $5.8~~decreased $20.5 million, or ~~2.2%~~8.2%, ~~from $262.7 million at December 31, 2016~~since year end 2018 to ~~$256.9~~total $228.4 million at September 30, ~~2017.~~2019. Securities balances decreased $23.9 million during the third quarter of 2019. Net ~~realized~~ gains of ~~$180,000~~$50,000 were ~~recognized~~realized during the third quarter of 2019 through sales and call activity. For the first nine months of ~~2017~~2019, there were net gains of $274,000 realized through sales and call ~~activity, as compared with $608,000 recognized during~~activity. The Company actively manages the ~~first nine months of 2016. The decline in~~portfolio to improve its liquidity and maximize the ~~volume of securities was a strategic decision by management to fund strong loan growth with securities sales. Also, there were normal securities amortization, call activity, sales and maturities.~~return within the desired risk profile.

The Company is required to account for the effect of ~~market~~ changes in the fair value of securities available-for-sale (AFS) under FASB ASC 320,Investments – Debt and Equity Securities. The ~~market~~fair value of the AFS portfolio was ~~$210.4~~$190.2 million at September 30, ~~2017~~2019 and ~~$216.1~~$206.7 million at December 31, ~~2016.~~2018. At September 30, ~~2017,~~2019, the Company had a net unrealized gain on the AFS portfolio of ~~$1.2~~$4.8 million compared with a net unrealized loss of ~~$621,000~~$792,000 at December 31, ~~2016.~~2018. Municipal securities comprised ~~59.1%~~49.8% of the total AFS portfolio at September 30, ~~2017.~~2019. 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~~$36.8 million and ~~$21.1~~$34.2 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. There were federal funds ~~sold~~purchased of ~~$144,000~~$71,000 at September 30, ~~2017~~2019 and ~~federal funds purchased of $4.7~~$19.4 million at December 31, ~~2016.~~2018. Interest bearing bank deposits were $13.7 million at September 30, 2019 compared with $15.9 million at December 31, 2018.

Interest bearing deposits at September 30, ~~2017~~2019 were ~~$933.1~~$994.2 million, ~~an increase~~a decrease of ~~$24.6~~$5.6 million from December 31, 2018. During 2019, NOW accounts declined $18.3 million, or ~~2.7%, from $908.4~~11.0% and were $147.6 million at ~~December 31, 2016. MMDA balances have increased $33.1~~September 30, 2019. Time deposits less than or equal to $250,000 decreased $1.4 million ~~or 29.7%, during 2017, the result of promotions~~and total $483.7 million 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~~September 30, 2019. Time deposits over $250,000 ~~declined $9.9~~grew by $7.3 million during 2019 and were $136.2 million at September 30, 2019. Savings accounts grew $3.5 million during 2019 and total $96.4 million. Money market deposit accounts, $130.3 million at September 30, 2019, grew $3.3 million, or ~~7.7%.~~2.6%, during the first nine months of 2019.

Table of Contents

FHLB advances were ~~$81.3~~$73.7 million at September 30, ~~2017,~~2019, compared with ~~$81.9~~$59.4 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 2017.2018.

Shareholders’ equity was ~~$124.4~~$152.6 million at September 30, ~~2017~~2019 and ~~$114.5~~$137.5 million at December 31, ~~2016.~~2018. Shareholders’ 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 10.7% at September 30, 2019 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 2017.~~9.9% at December 31, 2018.

Asset Quality – excluding PCI loans

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

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

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled ~~$15.4~~$10.5 million at September 30, ~~2017~~2019 and net charge-offs were ~~$976,000~~$715,000 for the nine months ended September 30, ~~2017.~~2019. This compares with nonperforming assets of ~~$14.7~~$10.6 million and net ~~charge-offs~~recoveries of ~~$516,000 at and~~$14,000 for the year ended December 31, ~~2016.~~

2018.

Nonperforming loans were ~~$12.7~~$5.7 million at September 30, ~~2017,~~2019, a ~~$2.4~~$3.8 million ~~increase~~decrease from ~~$10.2~~$9.5 million at December 31, ~~2016.~~2018. The ~~$2.4~~$3.8 million ~~increase~~decrease in nonperforming loans since December 31, ~~2016~~2018 was the net result of ~~$7.0~~$5.0 million in additions to nonperforming loans and ~~$4.6~~$8.8 million in reductions. The increase related mainly to two commercial loans totaling $616,000, one multifamily real estate loan of $2.6 million, and one 1-4 family residential mortgage loan of $764,000. With respect to the reductions in nonperforming loans, ~~$1.1~~$1.3 million were payments to existing credits, ~~$1.2~~$1.1 million were charge-offs, ~~$926,000~~$1.5 million were ~~loans returned to accruing status, $23,000~~paid off, $3.8 million were ~~loans~~ transferred to OREO, and ~~$1.4~~$1.1 million ~~paid off.~~

returned to accruing status.

The allowance for loan losses, excluding PCI, equaled ~~68.37%~~146.1% of nonaccrual loans at September 30, ~~2017~~2019 compared with ~~92.68%~~94.6% at December 31, ~~2016.~~2018. The ratio of nonperforming assets to loans and OREO ~~continued to decline.~~decreased 6 basis points. The ratio was ~~1.72%~~1.01% at September 30, ~~2017~~2019 versus ~~1.74%~~1.07% at December 31, ~~2016.~~2018.

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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, total impaired loans, excluding PCI loans, equaled ~~$18.0~~$10.4 million and ~~$18.5~~$17.9 million, respectively.

Table of Contents

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
Nonaccrual loans $ 12,677 $ 10,243
Loans past due 90 days and accruing interest — —
Total nonperforming loans 12,677 10,243
OREO 2,710 4,427
Total nonperforming assets $ 15,387 $ 14,670

Accruing troubled debt restructure loans $ 5,313 $ 4,653

Balances
Specific reserve on impaired loans 965 1,130
General reserve related to unimpaired loans 7,702 8,363
Total allowance for loan losses 8,667 9,493
Average loans during the year, net of unearned income 856,465 787,245

Impaired loans 17,990 18,541
Non-impaired loans 871,990 817,758
Total loans, net of unearned income 889,980 836,299

Ratios
Allowance for loan losses to loans 0.97 % 1.14 %
Allowance for loan losses to nonperforming loans 68.37 92.68
Allowance for loan losses to nonaccrual loans 68.37 92.68
General reserve to non-impaired loans 0.88 1.02
Nonaccrual loans to loans 1.42 1.22
Nonperforming assets to loans and OREO 1.72 1.74
Net charge-offs to average loans 0.15 0.07

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 30, 2017, 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 were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at September 30, 2017 was $7.0 million, of which $1.7 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”. 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.


	September 30, 2019			December 31, 2018
Nonaccrual loans	$	5,746		$	9,500
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		5,746			9,500
OREO		4,740			1,099
Total nonperforming assets	$	10,486		$	10,599

Accruing troubled debt restructure loans	$	4,658		$	8,359

Balances
Specific reserve on impaired loans		920			2,246
General reserve related to unimpaired loans		7,473			6,737
Total allowance for loan losses		8,393			8,983

Average loans during the year, net of unearned income		1,016,041			960,978

Impaired loans		10,404			17,859
Non-impaired loans		1,024,118			975,846
Total loans, net of unearned income		1,034,522			993,705

Ratios
Allowance for loan losses to loans		0.81	%		0.90	%
Allowance for loan losses to nonaccrual loans		146.10			94.56
General reserve to non-impaired loans		0.73			0.69
Nonaccrual loans to loans		0.56			0.96
Nonperforming assets to loans and OREO		1.01			1.07
Net charge-offs (recoveries) to average loans		0.07			—

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 30, ~~2017~~2019 and December 31, ~~2016~~2018 is below (dollars in thousands):


	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	2,140	$	2,893
Residential 1‑4 family					$	1,349	$	1,257
Commercial		3,492		1,758		1,059		2,123
Construction and land development		4,283		5,495		406		4,571
Agriculture		66		—
Multifamily						2,494		—
Total real estate loans		9,981		10,146		5,308		7,951
Commercial loans		2,666		53		431		1,549
Consumer installment loans		30		44		7		—
Total loans	$	12,677	$	10,243	$	5,746	$	9,500

At September 30, 2017, the Company had six 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 30, 2017 was $4.3 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 relationships was $456,000 at September 30, 2017, or 10.64% of the total credit exposure outstanding. The Company establishes its reserves as described above in~~Allowance 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~~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 PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which ~~include~~includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash

Table of Contents

flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as ~~impairment~~impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

Capital Requirements

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

Effective September 2018, the Federal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from $1 billion to $3 billion, thereby eliminating the Company’s consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level.

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and 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 allowance for loan ~~loss allowance.~~losses. “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~~“leverage ratio” is tier 1 capital divided by total average assets.

The ~~Company’s~~Bank’s ratio of total risk-based capital was ~~13.4%~~13.8% at September 30, ~~2017~~2019 compared with ~~13.2%~~13.3% at December 31, ~~2016.~~2018. The tier 1 risk-based capital ratio was ~~12.6%~~13.1% at September 30, ~~2017~~2019 and ~~12.2%~~12.6% at December 31, ~~2016.~~2018. The ~~Company’s~~Bank’s tier 1 leverage ratio was ~~10.0%~~10.7% at September 30, ~~2017~~2019 and ~~9.6%~~10.2% at December 31, ~~2016.~~2018. 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%~~13.1% at September 30, ~~2017~~2019 and ~~11.8%~~12.6% at December 31, ~~2016.~~

2018.

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~~Bank 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 30, ~~2017,~~2019, the ~~Company~~Bank had a capital conservation buffer of ~~5.4%, well above the 2017 required buffer of 1.25%~~5.8%.

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.

Table of Contents

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 30, ~~2017~~2019 and December 31, ~~2016~~2018 was as follows (dollars in thousands):


	September 30, 2019			December 31, 2018
Cash and due from banks	$	23,056		$	18,292
Interest bearing bank deposits		13,742			15,927
Available for sale securities, at fair value, unpledged		163,453			174,842
Total liquid assets	$	200,251		$	209,061

Deposits and other liabilities	$	1,270,043		$	1,255,689
Ratio of liquid assets to deposits and other liabilities		15.77	%		16.65	%

September 30, 2017 December 31, 2016
Cash and due from banks $ 9,750 $ 13,828
Interest bearing bank deposits 12,656 7,244
Federal funds sold 144 —
Available for sale securities, at fair value, unpledged 175,776 170,898
Total liquid assets $ 198,326 $ 191,970

Deposits and other liabilities $ 1,169,707 $ 1,135,280
Ratio of liquid assets to deposits and other liabilities 16.96 % 16.91 %

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. The Company has a total of $55 million in this type of facility in the aggregate at September 30, 2019.

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 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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


	September 30, 2019		December 31, 2018
Commitments with off-balance sheet risk:
Commitments to extend credit	$	220,249	$	204,831
Standby letters of credit		10,954		5,280
Total commitments with off-balance sheet risks	$	231,203	$	210,111

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~~The Company ~~entered into an interest~~designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate ~~swap~~borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had cash flow hedges with a total notional ~~amount~~amounts of $40 million and $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 and an unrealized loss of $17,000 and $70,000~~million at September 30, ~~2017~~2019 and December 31, ~~2016, respectively, which was~~2018, respectively. The Company recorded a fair value asset of $15,000 and a fair value liability of $157,000 in other assets and other liabilities, ~~respectively.~~respectively, at September 30, 2019. The Company recorded a fair value asset of $253,000 in other assets at December 31, 2018. The Company’s cash flow ~~hedge is~~hedges are deemed to be highly effective. Therefore, the net gain ~~and loss~~(loss) was recorded as a component of other comprehensive income (loss) recorded in the Company’s ~~Consolidated Statements~~consolidated statements of ~~Comprehensive Income.~~comprehensive income.

Table of Contents

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

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

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a ~~12-month~~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 30, ~~2017~~2019 (dollars in thousands):


	September 30, 2017						September 30, 2019
	%			$			%	$
Change in Yield curve
+400 bp		0.2			91		5.7	2,827
+300 bp		0.2			90		4.5	2,214
+200 bp		0.2			70		3.1	1,508
+100 bp		0.1			45		1.3	633
most likely		—			—		—	—
-100 bp		(0.4	)		(171	)
-200 bp		(2.3	)		(1,015	)
-300 bp		(2.5	)		(1,081	)
-400 bp		(2.5	)		(1,085	)
‑100 bp							(2.1)	(1,029)
‑200 bp							(3.7)	(1,798)
‑300 bp							(3.7)	(1,841)
‑400 bp							(3.7)	(1,841)

At September 30, ~~2017,~~2019, 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%~~3.7%. 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.

Table of Contents

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,~~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)~~13a‑15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~SEC’s~~ rules and ~~forms.~~forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

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

Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

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~~10‑K for the year ended December 31, ~~2016.~~2018.

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

None.

Table of Contents

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable

Item 5.Other Information

None.

Item 6.Exhibits

Exhibit No.

~~Exhibit No.~~	Description
31.1		Rule ~~13a-14(a)~~13a‑14(a)/~~15d-14(a)~~15d‑14(a) Certification for Chief Executive Officer*
31.2		Rule ~~13a-14(a)~~13a‑14(a)/~~15d-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~~10‑Q for the period ended September 30, ~~2017~~2019 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.~~

*Filed herewith.

Table of Contents

SIGNATURES~~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: November 8, 2019

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

Date: November 8, 2019

~~Date: November 8, 2017~~