UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

þ

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

For the quarterly period ended September 30, 2017March 31, 2020

 

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)

 

Virginia20-2652949

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) 934-9999934‑9999

(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 postsubmit. 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-212b‑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-212b‑2 of the Exchange Act). Yes o  No þ

 

At September 30, 2017,March 31, 2020, there were 22,047,83322,317,420 shares of the Company’s common stock outstanding.

 

2

 

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017MARCH 31, 2020 AND DECEMBER 31, 20162019

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

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019*

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

15,406

 

$

16,976

Interest bearing bank deposits

 

 

14,960

 

 

11,708

Total cash and cash equivalents

 

 

30,366

 

 

28,684

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

202,711

 

 

186,969

Securities held to maturity, at cost (fair value of $25,485 and $36,633, respectively)

 

 

24,649

 

 

35,733

Equity securities, restricted, at cost

 

 

8,458

 

 

8,855

Total securities

 

 

235,818

 

 

231,557

 

 

 

 

 

 

 

Loans held for sale

 

 

2,470

 

 

501

 

 

 

 

 

 

 

Loans

 

 

1,079,229

 

 

1,058,323

Purchased credit impaired (PCI) loans

 

 

30,275

 

 

32,528

Total loans

 

 

1,109,504

 

 

1,090,851

Allowance for loan losses (loans of $11,819 and $8,429, respectively; PCI loans of $156 and $156, respectively)

 

 

(11,975)

 

 

(8,585)

Net loans

 

 

1,097,529

 

 

1,082,266

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

29,065

 

 

29,472

Bank premises and equipment held for sale

 

 

1,589

 

 

1,589

Right-of-use lease assets

 

 

6,234

 

 

6,472

Other real estate owned

 

 

4,506

 

 

4,527

Bank owned life insurance

 

 

29,514

 

 

29,340

Other assets

 

 

16,449

 

 

16,432

Total assets

 

$

1,453,540

 

$

1,430,840

 

 

 

 

 

 

 

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest bearing

 

$

188,327

 

$

178,584

Interest bearing

 

 

1,032,731

 

 

984,864

Total deposits

 

 

1,221,058

 

 

1,163,448

 

 

 

 

 

 

 

Federal funds purchased

 

 

 —

 

 

24,437

Federal Home Loan Bank borrowings

 

 

58,333

 

 

68,500

Trust preferred capital notes

 

 

4,124

 

 

4,124

Lease liabilities

 

 

6,513

 

 

6,737

Other liabilities

 

 

8,044

 

 

8,115

Total liabilities

 

 

1,298,072

 

 

1,275,361

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Common stock (200,000,000 shares authorized, $0.01 par value; 22,317,420 and 22,422,621 shares issued and outstanding, respectively)

 

 

223

 

 

224

Additional paid in capital

 

 

150,219

 

 

150,728

Retained earnings

 

 

2,856

 

 

2,562

Accumulated other comprehensive income

 

 

2,170

 

 

1,965

Total shareholders’ equity

 

 

155,468

 

 

155,479

Total liabilities and shareholders’ equity

 

$

1,453,540

 

$

1,430,840


  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


3

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019

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

 

 

 

 

 

 

 

 Three months ended  Nine months ended 

 

Three months ended

 

 September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016 

 

March 31, 2020

    

March 31, 2019

 

Interest and dividend income                

 

 

  

 

 

  

 

Interest and fees on loans $10,127  $9,156  $29,676  $26,582 

 

$

13,086

 

$

12,419

 

Interest and fees on PCI loans  1,423   1,549   4,355   4,704 

 

 

1,097

 

 

1,293

 

Interest on federal funds sold  1      1    
Interest on deposits in other banks  65   22   143   66 

 

 

69

 

 

96

 

Interest and dividends on securities                

 

 

 

 

 

 

 

Taxable  1,171   1,133   3,577   3,528 

 

 

1,351

 

 

1,522

 

Nontaxable  602   547   1,805   1,698 

 

 

343

 

 

476

 

Total interest and dividend income  13,389   12,407   39,557   36,578 

 

 

15,946

 

 

15,806

 

Interest expense                

 

 

  

 

 

  

 

Interest on deposits  2,053   1,550   5,776   4,638 

 

 

3,419

 

 

3,234

 

Interest on borrowed funds  310   354   914   1,091 

 

 

289

 

 

447

 

Total interest expense  2,363   1,904   6,690   5,729 

 

 

3,708

 

 

3,681

 

Net interest income  11,026   10,503   32,867   30,849 

 

 

12,238

 

 

12,125

 

Provision for loan losses  150   250   150   450 

 

 

3,300

 

 

 —

 

Net interest income after provision for loan losses  10,876   10,253   32,717   30,399 

 

 

8,938

 

 

12,125

 

Noninterest income                

 

 

  

 

 

  

 

Service charges on deposit accounts  678   617   2,011   1,785 
Gain on securities transactions, net  48   88   180   608 

Service charges and fees

 

 

672

 

 

609

 

Loss on securities transactions, net

 

 

(39)

 

 

(14)

 

Gain on sale of other loans

 

 

11

 

 

 —

 

Income on bank owned life insurance  235   238   704   630 

 

 

174

 

 

181

 

Mortgage loan income  59   252   163   599 

 

 

221

 

 

62

 

Other  145   150   448   439 

 

 

296

 

 

176

 

Total noninterest income  1,165   1,345   3,506   4,061 

 

 

1,335

 

 

1,014

 

Noninterest expense                

 

 

  

 

 

  

 

Salaries and employee benefits  4,998   4,676   14,566   13,848 

 

 

5,152

 

 

5,381

 

Occupancy expenses  857   756   2,329   2,043 

 

 

827

 

 

930

 

Equipment expenses  305   242   849   729 

 

 

372

 

 

381

 

FDIC assessment  185   253   550   756 

 

 

125

 

 

150

 

Data processing fees  501   410   1,466   1,230 

 

 

592

 

 

568

 

Amortization of intangibles  62   477   878   1,430 
Other real estate expense (income), net  37   28   98   (89)

Other real estate expense, net

 

 

 6

 

 

(8)

 

Other operating expenses  1,761   1,436   4,957   4,591 

 

 

1,520

 

 

1,438

 

Total noninterest expense  8,706   8,278   25,693   24,538 

 

 

8,594

 

 

8,840

 

Income before income taxes  3,335   3,320   10,530   9,922 

 

 

1,679

 

 

4,299

 

Income tax expense  919   862   2,687   2,726 

 

 

264

 

 

796

 

Net income $2,416  $2,458  $7,843  $7,196 

 

$

1,415

 

$

3,503

 

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

 

$

0.06

 

$

0.16

 

Net income per share — diluted

 

$

0.06

 

$

0.16

 

Weighted average number of shares outstanding                

 

 

  

 

 

  

 

Basic  22,041   21,935   22,000   21,902 

 

 

22,400

 

 

22,141

 

Diluted  22,542   22,127   22,491   22,105 

 

 

22,591

 

 

22,430

 

 

See accompanying notes to unaudited consolidated financial statements


4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019

(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

 

 

    

March 31, 2020

    

March 31, 2019

 

Net income

 

$

1,415

 

$

3,503

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized gain  on investment securities:

 

 

 

 

 

 

 

Change in unrealized gain on investment securities

 

 

782

 

 

2,204

 

Tax related to unrealized gain on investment securities

 

 

(172)

 

 

(485)

 

Reclassification adjustment for loss on securities sold

 

 

39

 

 

14

 

Tax related to realized loss on securities sold

 

 

(9)

 

 

(3)

 

Cash flow hedge:

 

 

 

 

 

 

 

Change in unrealized loss on cash flow hedge

 

 

(557)

 

 

(94)

 

Tax related to cash flow hedge

 

 

122

 

 

20

 

Total other comprehensive income

 

 

205

 

 

1,656

 

Total comprehensive income

 

$

1,620

 

$

5,159

 

 

See accompanying notes to unaudited consolidated financial statements


5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019

(dollars and shares in thousands)

          Accumulated    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Additional     Other    

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 Common Stock Paid in Retained Comprehensive    

 

 

 

 

 

 

Additional

 

Retained

 

Other

 

 

 

 Shares  Amount  Capital  Deficit  Income (Loss)  Total 

 

Common Stock

 

Paid in

 

Earnings

 

Comprehensive

 

 

 

             

    

Shares

    

Amount

    

Capital

    

(Deficit)

    

Income (Loss)

    

Total

Balance January 1, 2016  21,867  $219  $145,907  $(41,050) $(589) $104,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2019

 

22,132

 

$

221

 

$

148,763

 

$

(10,244)

 

$

(1,279)

 

$

137,461

Issuance of common stock  28      122         122 

 

 6

 

 

 —

 

 

54

 

 

 —

 

 

 —

 

 

54

Exercise and issuance of employee stock options  52      475         475 

 

31

 

 

 1

 

 

298

 

 

 —

 

 

 —

 

 

299

Net income           7,196      7,196 

 

 —

 

 

 —

 

 

 —

 

 

3,503

 

 

 —

 

 

3,503

Dividends paid on common stock

 

 —

 

 

 —

 

 

 —

 

 

(665)

 

 

 —

 

 

(665)

Other comprehensive income              2,449   2,449 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,656

 

 

1,656

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 March 31, 2019

 

22,169

 

$

222

 

$

149,115

 

$

(7,406)

 

$

377

 

$

142,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2020

 

22,423

 

$

224

 

$

150,728

 

$

2,562

 

$

1,965

 

$

155,479

Issuance of common stock  21      120         120 

 

 6

 

 

 —

 

 

54

 

 

 —

 

 

 —

 

 

54

Exercise and issuance of employee stock options  67      666         666 

 

 4

 

 

 —

 

 

242

 

 

 —

 

 

 —

 

 

242

Stock purchased under stock repurchase program

 

(116)

 

 

(1)

 

 

(805)

 

 

 —

 

 

 —

 

 

(806)

Net income           7,843      7,843 

 

 —

 

 

 —

 

 

 —

 

 

1,415

 

 

 —

 

 

1,415

Dividends paid on common stock

 

 —

 

 

 —

 

 

 —

 

 

(1,121)

 

 

 —

 

 

(1,121)

Other comprehensive income              1,258   1,258 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

205

 

 

205

Balance September 30, 2017  22,048  $220  $147,453  $(23,285) $35  $124,423 

Balance March 31, 2020

 

22,317

 

$

223

 

$

150,219

 

$

2,856

 

$

2,170

 

$

155,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements


6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AND 20162019

(dollars in thousands)

 

 

 

 

 

 

 

 September 30, 2017  September 30, 2016 

    

March 31, 2020

    

March 31, 2019

 

Operating activities:        

 

 

 

 

 

 

 

Net income $7,843  $7,196 

 

$

1,415

 

$

3,503

 

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

 

 

 

 

 

 

 

Depreciation and intangibles amortization  2,136   2,571 

Depreciation

 

 

483

 

 

545

 

Leased asset amortization

 

 

238

 

 

231

 

Stock-based compensation expense  559   426 

 

 

285

 

 

266

 

Tax benefit of exercised stock options  (105)  (50)

 

 

(6)

 

 

(31)

 

Amortization of purchased loan premium  141   191 

 

 

160

 

 

60

 

Provision for loan losses  150   450 

 

 

3,300

 

 

 —

 

Amortization of security premiums and accretion of discounts, net  1,331   1,307 

 

 

233

 

 

281

 

Net gain on sale of securities  (180)  (608)

Net loss on sale of securities

 

 

39

 

 

14

 

Net gain on sale and valuation of other real estate owned  (4)  (315)

 

 

(6)

 

 

(50)

 

Net gain on sale of loans

 

 

(11)

 

 

 —

 

Originations of mortgages held for sale     (49,185)

 

 

(8,668)

 

 

(1,976)

 

Proceeds from sales of mortgages held for sale     51,286 

 

 

6,699

 

 

1,726

 

Increase in bank owned life insurance investment  (572)  (520)

 

 

(174)

 

 

(181)

 

Changes in assets and liabilities:        

 

 

 

 

 

 

 

(Increase) decrease in other assets  (1,526)  334 
Increase (decrease) in accrued expenses and other liabilities  400   (227)

Decrease (increase) in other assets

 

 

174

 

 

(366)

 

Decrease in accrued expenses and other liabilities

 

 

(846)

 

 

(58)

 

Net cash provided by operating activities  10,173   12,856 

 

 

3,315

 

 

3,964

 

        

 

 

 

 

 

 

 

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

 

 

9,893

 

 

19,264

 

Proceeds from calls/maturities/paydowns of held to maturity securities

 

 

11,065

 

 

626

 

Proceeds from sales of restricted equity securities

 

 

1,700

 

 

 —

 

Purchase of available for sale securities  (40,839)  (43,494)

 

 

(25,069)

 

 

(10,682)

 

Purchase of held to maturity securities  (643)  (19,589)
Purchase of equity securities, restricted  (1,321)  (3,756)

Purchase of restricted equity securities

 

 

(1,302)

 

 

(626)

 

Proceeds from sale of other real estate owned  2,118   1,851 

 

 

27

 

 

316

 

Improvements of other real estate, net of insurance proceeds     (34)
Net increase in loans  (49,063)  (59,519)

 

 

(19,527)

 

 

(4,351)

 

Principal recoveries of loans previously charged off  380   272 

 

 

184

 

 

77

 

Purchase of premises and equipment, net  (2,370)  (1,573)

 

 

(76)

 

 

(199)

 

Purchase small business investment company fund investment  (525)  (262)

 

 

(250)

 

 

(262)

 

Purchase of bank owned life insurance investment     (5,000)
Proceeds from sale of premises and equipment     145 
Net cash used in investing activities  (43,035)  (21,347)

Proceeds from sale of loans

 

 

632

 

 

705

 

Net cash (used in) provided by investing activities

 

 

(22,723)

 

 

4,868

 

        

 

 

 

 

 

 

 

Financing activities:        

 

 

  

 

 

  

 

Net increase in deposits  41,088   21,805 

 

 

57,610

 

 

3,148

 

Net decrease in federal funds purchased  (4,714)  (18,921)

 

 

(24,437)

 

 

(19,440)

 

Net (decrease) increase in Federal Home Loan Bank borrowings  (591)  13,426 

Net (decrease) increase in short-term Federal Home Loan Bank borrowings

 

 

(10,000)

 

 

10,000

 

Proceeds from long-term Federal Home Loan Bank borrowings

 

 

40,000

 

 

 —

 

Payments on long-term Federal Home Loan Bank borrowings

 

 

(40,167)

 

 

(375)

 

Proceeds from issuance of common stock  227   116 

 

 

11

 

 

87

 

Payments on long-term debt  (1,670)  (2,937)
Net cash provided by financing activities  34,340   13,489 

Cash dividends paid

 

 

(1,121)

 

 

(665)

 

Repurchase of common stock

 

 

(806)

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

21,090

 

 

(7,245)

 

        

 

 

 

 

 

 

 

Net increase in cash and cash equivalents  1,478   4,998 

 

 

1,682

 

 

1,587

 

        

 

 

 

 

 

 

 

Cash and cash equivalents:        

 

 

  

 

 

  

 

Beginning of the period  21,072   16,969 

 

 

28,684

 

 

34,219

 

End of the period $22,550  $21,967 

 

$

30,366

 

$

35,806

 

        

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:        

 

 

  

 

 

  

 

Interest paid $6,638  $5,787 

 

$

3,689

 

$

3,512

 

Income taxes paid  3,320   3,444 

 

 

 —

 

 

439

 

Transfer of OREO property  397   947 

Transfers of loans to other real estate owned

 

 

 —

 

 

392

 

Right-of-use lease assets in exchange for lease liability

 

 

 

 

7,408

 

 

See accompanying notes to unaudited consolidated financial statements

 

7

 

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 onetwo 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-K10‑K for the year ended December 31, 2016.2019. 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,March 31, 2020, the statements of income and comprehensive income, for the three and nine months ended September 30, 2017, and the statements of changes in shareholders’ equity, and cash flows for the ninethree months ended September 30, 2017.March 31, 2020. Results for the ninethree month period ended September 30, 2017March 31 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

2020.

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 PronouncementsDevelopments

In March 2017,2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the “agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the coronavirus (COVID-19) pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)Codification (ASC) 310-40, Receivables – Troubled Debt Restructurings by Creditors, Premium Amortization on Purchased Callable Debt Securities. The ASU shortensa restructuring of debt constitutes a troubled debt restructuring (TDR) if the amortization periodcreditor, for certain callable debt securities held at a premiumeconomic or legal reasons related to the earliest call date.debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the impact of COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments as of December 31, 2019. This interagency guidance is expected to

8

 


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 no impact on its financial statements.

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

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

The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company does not expect the adoption of this guidance 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 expectedfinancial statements; however, due 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 ofuncertainties regarding 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; andASU 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 anticipatedeconomic 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 notCOVID-19, this 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.cannot be quantified at this time. 


Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at September 30, 2017March 31, 2020 and December 31, 20162019 were as follows(dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Gross Unrealized

 

  

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury securities

 

$

7,497

 

$

 3

 

$

 —

 

$

7,500

U.S. Government agencies

 

 

21,452

 

 

67

 

 

(715)

 

 

20,804

State, county and municipal

 

 

98,168

 

 

4,120

 

 

(99)

 

 

102,189

Mortgage backed securities

 

 

45,118

 

 

1,959

 

 

(80)

 

 

46,997

Asset backed securities

 

 

13,568

 

 

 4

 

 

(646)

 

 

12,926

Corporate bonds

 

 

12,388

 

 

35

 

 

(128)

 

 

12,295

Total Securities Available for Sale

 

$

198,191

 

$

6,188

 

$

(1,668)

 

$

202,711

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

State, county and municipal

 

$

24,649

 

$

847

 

$

(11)

 

$

25,485

Total Securities Held to Maturity

 

$

24,649

 

$

847

 

$

(11)

 

$

25,485

 

  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, 2019

 

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

22,104

 

$

51

 

$

(219)

 

$

21,936

State, county and municipal

 

 

95,467

 

 

3,167

 

 

(42)

 

 

98,592

Mortgage backed securities

 

 

48,045

 

 

808

 

 

(113)

 

 

48,740

Asset backed securities

 

 

11,637

 

 

49

 

 

(82)

 

 

11,604

Corporate bonds

 

 

6,016

 

 

84

 

 

(3)

 

 

6,097

Total Securities Available for Sale

 

$

183,269

 

$

4,159

 

$

(459)

 

$

186,969

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government agencies

 

$

10,000

 

$

 —

 

$

(12)

 

$

9,988

State, county and municipal

 

 

25,733

 

 

913

 

 

(1)

 

 

26,645

Total Securities Held to Maturity

 

$

35,733

 

$

913

 

$

(13)

 

$

36,633

 

The amortized cost and fair value of securities at September 30, 2017March 31, 2020 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

 

$

2,727

 

$

2,727

 

$

25,502

 

$

25,665

Due after one year through five years

 

 

15,442

 

 

16,012

 

 

68,115

 

 

69,161

Due after five years through ten years

 

 

6,229

 

 

6,463

 

 

83,115

 

 

86,513

Due after ten years

 

 

251

 

 

283

 

 

21,459

 

 

21,372

Total securities

 

$

24,649

 

$

25,485

 

$

198,191

 

$

202,711

9

 

  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 

Proceeds from sales and calls of securities available for sale were $9.1$6.2 million and $22.2$16.8 million during the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $30.1 million and $93.7 million for the nine months ended September 30, 2017 and 2016,2019, 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 saletransactions during the three and nine months ended September 30, 2017March 31, 2020 and 20162019 were as follows (dollars(dollars in thousands):

 

 

 

 

 

 

 Three Months Ended  Nine Months Ended 

 

Three months ended

 September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016 

    

March 31, 2020

    

March 31, 2019

Gross realized gains $114  $191  $378  $1,223 

 

$

29

 

$

53

Gross realized losses  (66)  (103)  (198)  (615)

 

 

(68)

 

 

(67)

Net securities gains $48  $88  $180  $608 

Net securities loss

 

$

(39)

 

$

(14)

 

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, 2017March 31, 2020 and 2016.

2019.

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, 2017March 31, 2020 and December 31, 20162019 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

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. Government agencies

 

$

6,628

 

$

(380)

 

$

6,155

 

$

(335)

 

$

12,783

 

$

(715)

State, county and municipal

 

 

5,834

 

 

(88)

 

 

306

 

 

(11)

 

 

6,140

 

 

(99)

Mortgage backed securities

 

 

8,977

 

 

(79)

 

 

437

 

 

(1)

 

 

9,414

 

 

(80)

Asset backed securities

 

 

9,675

 

 

(635)

 

 

599

 

 

(11)

 

 

10,274

 

 

(646)

Corporate bonds

 

 

10,512

 

 

(128)

 

 

 —

 

 

 —

 

 

10,512

 

 

(128)

Total

 

$

41,626

 

$

(1,310)

 

$

7,497

 

$

(358)

 

$

49,123

 

$

(1,668)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

State, county and municipal

 

$

1,765

 

$

(11)

 

$

 —

 

$

 —

 

$

1,765

 

$

(11)

Total

 

$

1,765

 

$

(11)

 

$

 —

 

$

 —

 

$

1,765

 

$

(11)

 

  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, 2019

 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. Government agencies

 

$

6,396

 

$

(102)

 

$

8,020

 

$

(117)

 

$

14,416

 

$

(219)

State, county and municipal  39,713   (848)  3,885   (312)  43,598   (1,160)

 

 

7,088

 

 

(32)

 

 

308

 

 

(10)

 

 

7,396

 

 

(42)

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

 

 

11,001

 

 

(40)

 

 

4,287

 

 

(73)

 

 

15,288

 

 

(113)

Asset backed securities

 

 

4,861

 

 

(74)

 

 

625

 

 

(8)

 

 

5,486

 

 

(82)

Corporate bonds

 

 

248

 

 

(3)

 

 

 —

 

 

 —

 

 

248

 

 

(3)

Total $87,178  $(1,606) $42,099  $(1,298) $129,277  $(2,904)

 

$

29,594

 

$

(251)

 

$

13,240

 

$

(208)

 

$

42,834

 

$

(459)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

9,988

 

$

(12)

 

$

9,988

 

$

(12)

State, county and municipal  8,052   (185)  -   -   8,052   (185)

 

 

31

 

 

 —

 

 

622

 

 

(1)

 

 

653

 

 

(1)

Total $17,898  $(339) $-  $-  $17,898  $(339)

 

$

31

 

$

 —

 

$

10,610

 

$

(13)

 

$

10,641

 

$

(13)

 

The unrealized losses (impairments) in the investment portfolio at September 30, 2017March 31, 2020 and December 31, 20162019 are generally a result of market fluctuations of interest rates that occur daily. A lack of liquidity in the bond market at March 31, 2020 caused market values to decline, thereby increasing unrealized losses.  The unrealized losses are from 11965 securities at September 30, 2017.March 31, 2020. Of those, 10743 are investment grade, have U.S. government agency guarantees, or are backed

10

by the full faith and credit of local municipalities throughout the United States. TwelveTen investment grade asset-backed securities comprised of student loan pools included in corporate obligations and other bond obligations comprise12 corporate bonds make up the remaining securities with unrealized losses at September 30, 2017.March 31, 2020. 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 $46.1million and $75.8$47.3 million at SeptemberMarch 30, 20172020 and December 31, 2016,2019, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $3.9$5.5 million and $4.4$5.8 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 30, 2017March 31, 2020 and December 31, 2016,2019, there were no securities purchased from a single issuer, other than U.S. Treasury issuesecurities 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, 2017March 31, 2020 and December 31, 20162019 were comprised of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 September 30, 2017  December 31, 2016 

 

March 31, 2020

 

December 31, 2019

 

 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

 

$

219,735

 

20.36

%  

$

223,538

 

21.12

%

Commercial  345,759   38.85   339,804   40.63 

 

 

410,438

 

38.03

 

 

396,858

 

37.50

 

Construction and land development  102,594   11.53   98,282   11.75 

 

 

149,833

 

13.88

 

 

146,566

 

13.85

 

Second mortgages  7,399   0.83   7,911   0.95 

 

 

5,954

 

0.55

 

 

6,639

 

0.63

 

Multifamily  53,642   6.03   39,084   4.67 

 

 

76,206

 

7.06

 

 

72,978

 

6.90

 

Agriculture  7,588   0.85   7,185   0.86 

 

 

7,038

 

0.65

 

 

8,346

 

0.79

 

Total real estate loans  746,727   83.91   700,129   83.72 

 

 

869,204

 

80.53

 

 

854,925

 

80.79

 

Commercial loans  136,643   15.35   129,300   15.46 

 

 

198,544

 

18.40

 

 

191,183

 

18.06

 

Consumer installment loans  5,331   0.60   5,627   0.67 

 

 

10,446

 

0.97

 

 

11,163

 

1.05

 

All other loans  1,279   0.14   1,243   0.15 

 

 

1,035

 

0.10

 

 

1,052

 

0.10

 

Total loans $889,980   100.00% $836,299   100.00%

 

$

1,079,229

 

100.00

%  

$

1,058,323

 

100.00

%

 

The Company held $16.7$12.1  million and $15.8$12.7 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, 2017March 31, 2020 and December 31, 2016,2019, 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$974,000 and $749,000$1.0 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, 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, 2017March 31, 2020 and December 31, 2016,2019, the Company’s allowance for creditloan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB 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 FASB ASC 310.


11

The following table summarizes information related to impaired loans as of September 30, 2017and for the three months ended March 31, 2020 (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

 

 

March 31, 2020

 

March 31, 2020

 

    

 

 

    

Unpaid

    

 

 

    

 

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Average

 

Interest

 

 

Investment (1)

 

Balance (2)

 

Allowance

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential 1‑4 family

 

$

1,160

 

$

1,485

 

$

 —

 

$

1,322

 

$

10

Commercial

 

 

3,132

 

 

3,835

 

 

 —

 

 

3,179

 

 

34

Construction and land development

 

 

328

 

 

328

 

 

 —

 

 

328

 

 

 —

Multifamily

 

 

 —

 

 

 —

 

 

 —

 

 

1,231

 

 

 —

Total real estate loans

 

 

4,620

 

 

5,648

 

 

 —

 

 

6,060

 

 

44

Subtotal impaired loans with no valuation allowance

 

 

4,620

 

 

5,648

 

 

 —

 

 

6,060

 

 

44

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

1,883

 

 

2,286

 

 

490

 

 

1,690

 

 

11

Commercial

 

 

97

 

 

559

 

 

24

 

 

238

 

 

 2

Construction and land development

 

 

1,450

 

 

1,551

 

 

136

 

 

749

 

 

 —

Total real estate loans

 

 

3,430

 

 

4,396

 

 

650

 

 

2,677

 

 

13

Commercial loans

 

 

1,629

 

 

1,629

 

 

909

 

 

1,042

 

 

 4

Consumer installment loans

 

 

10

 

 

10

 

 

 3

 

 

 9

 

 

 —

Subtotal impaired loans with a valuation allowance

 

 

5,069

 

 

6,035

 

 

1,562

 

 

3,728

 

 

17

Total:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

3,043

 

 

3,771

 

 

490

 

 

3,012

 

 

21

Commercial

 

 

3,229

 

 

4,394

 

 

24

 

 

3,417

 

 

36

Construction and land development

 

 

1,778

 

 

1,879

 

 

136

 

 

1,077

 

 

 —

Multifamily

 

 

 —

 

 

 —

 

 

 —

 

 

1,231

 

 

 —

Total real estate loans

 

 

8,050

 

 

10,044

 

 

650

 

 

8,737

 

 

57

Commercial loans

 

 

1,629

 

 

1,629

 

 

909

 

 

1,042

 

 

 4

Consumer installment loans

 

 

10

 

 

10

 

 

 3

 

 

 9

 

 

 —

Total impaired loans

 

$

9,689

 

$

11,683

 

$

1,562

 

$

9,788

 

$

61


(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 investmentinvestment.

(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 allowancesallowances.


12

The following table summarizes information related to impaired loans as of December 31, 20162019 and for the three and nine months ended September 30, 2016March 31, 2019 (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

 

 

December 31, 2019

 

March 31, 2019

 

    

 

 

    

Unpaid

    

 

 

    

 

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Average

 

Interest

 

 

Investment (1)

 

Balance (2)

 

Allowance

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential 1‑4 family

 

$

1,483

 

$

1,850

 

$

 —

 

$

1,555

 

$

11

Commercial

 

 

3,226

 

 

3,966

 

 

 —

 

 

3,435

 

 

35

Construction and land development

 

 

328

 

 

328

 

 

 —

 

 

 —

 

 

 —

Multifamily

 

 

2,463

 

 

2,463

 

 

 —

 

 

2,555

 

 

 —

Total real estate loans

 

 

7,500

 

 

8,607

 

 

 —

 

 

7,545

 

 

46

Subtotal impaired loans with no valuation allowance

 

 

7,500

 

 

8,607

 

 

 —

 

 

7,545

 

 

46

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

1,498

 

 

1,808

 

 

380

 

 

2,067

 

 

20

Commercial

 

 

378

 

 

876

 

 

87

 

 

1,143

 

 

 4

Construction and land development

 

 

48

 

 

147

 

 

11

 

 

4,336

 

 

 —

Total real estate loans

 

 

1,924

 

 

2,831

 

 

478

 

 

7,546

 

 

24

Commercial loans

 

 

454

 

 

460

 

 

105

 

 

2,157

 

 

 9

Consumer installment loans

 

 

 7

 

 

 7

 

 

 1

 

 

 3

 

 

 —

Subtotal impaired loans with a valuation allowance

 

 

2,385

 

 

3,298

 

 

584

 

 

9,706

 

 

33

Total:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

2,981

 

 

3,658

 

 

380

 

 

3,622

 

 

31

Commercial

 

 

3,604

 

 

4,842

 

 

87

 

 

4,578

 

 

39

Construction and land development

 

 

376

 

 

475

 

 

11

 

 

4,336

 

 

 —

Multifamily

 

 

2,463

 

 

2,463

 

 

 —

 

 

2,555

 

 

 —

Total real estate loans

 

 

9,424

 

 

11,438

 

 

478

 

 

15,091

 

 

70

Commercial loans

 

 

454

 

 

460

 

 

105

 

 

2,157

 

 

 9

Consumer installment loans

 

 

 7

 

 

 7

 

 

 1

 

 

 3

 

 

 —

Total impaired loans

 

$

9,885

 

$

11,905

 

$

584

 

$

17,251

 

$

79


(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 investmentinvestment.

(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 allowancesallowances.

 

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, 2017March 31, 2020 and December 31, 2016,2019, is set forth in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Nonaccrual loans

 

$

5,172

 

$

5,292

Trouble debt restructure and still accruing

 

 

4,517

 

 

4,593

Total impaired

 

$

9,689

 

$

9,885

 

  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, 2017March 31, 2020 and 2016.2019. For the three months ended September 30, 2017March 31, 2020 and 2016,2019, estimated interest income of $224,000$97,000 and $198,000, 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 and 2016, estimated interest income of $550,000 and $588,000,$223,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

13

There were no loans greater than 90 days past due and still accruing interest at September 30, 2017 and December 31, 2016.

The following tables present an age analysis of past due status of loans by category as of September 30, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

30‑89 Days

    

90+ Days Past

 

 

 

    

Total Past

    

 

 

    

Total Loans

 

 

Past Due

 

Due and Accruing

 

Nonaccrual

 

Due

 

Current

 

Receivable

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

$

1,268

 

$

 —

 

$

1,456

 

$

2,724

 

$

217,011

 

$

219,735

Commercial

 

 

1,689

 

 

 —

 

 

657

 

 

2,346

 

 

408,092

 

 

410,438

Construction and land development

 

 

 —

 

 

 —

 

 

1,778

 

 

1,778

 

 

148,055

 

 

149,833

Second mortgages

 

 

459

 

 

 —

 

 

 —

 

 

459

 

 

5,495

 

 

5,954

Multifamily

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

76,206

 

 

76,206

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,038

 

 

7,038

Total real estate loans

 

 

3,416

 

 

 —

 

 

3,891

 

 

7,307

 

 

861,897

 

 

869,204

Commercial loans

 

 

731

 

 

 —

 

 

1,270

 

 

2,001

 

 

196,543

 

 

198,544

Consumer installment loans

 

 

27

 

 

 —

 

 

11

 

 

38

 

 

10,408

 

 

10,446

All other loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,035

 

 

1,035

Total loans

 

$

4,174

 

$

 —

 

$

5,172

 

$

9,346

 

$

1,069,883

 

$

1,079,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 September 30, 2017 

    

30‑89 Days

    

90+ Days Past

 

 

 

    

Total Past

    

 

 

    

Total Loans

 30-89 Days
Past Due
  Nonaccrual  Total Past
Due
  Current  Total Loans
Receivable
 

 

Past Due

 

Due and Accruing

 

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

 

$

1,308

 

$

 —

 

$

1,378

 

$

2,686

 

$

220,852

 

$

223,538

Commercial     3,492   3,492   342,267   345,759 

 

 

552

 

 

 —

 

 

1,006

 

 

1,558

 

 

395,300

 

 

396,858

Construction and land development     4,283   4,283   98,311   102,594 

 

 

166

 

 

 —

 

 

376

 

 

542

 

 

146,024

 

 

146,566

Second mortgages           7,399   7,399 

 

 

229

 

 

 —

 

 

 —

 

 

229

 

 

6,410

 

 

6,639

Multifamily  2,545      2,545   51,097   53,642 

 

 

 —

 

 

 —

 

 

2,463

 

 

2,463

 

 

70,515

 

 

72,978

Agriculture     66   66   7,522   7,588 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,346

 

 

8,346

Total real estate loans  3,124   9,981   13,105   733,622   746,727 

 

 

2,255

 

 

 —

 

 

5,223

 

 

7,478

 

 

847,447

 

 

854,925

Commercial loans  603   2,666   3,269   133,374   136,643 

 

 

1,085

 

 

946

 

 

62

 

 

2,093

 

 

189,090

 

 

191,183

Consumer installment loans  17   30   47   5,284   5,331 

 

 

41

 

 

 —

 

 

 7

 

 

48

 

 

11,115

 

 

11,163

All other loans           1,279   1,279 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,052

 

 

1,052

Total loans $3,744  $12,677  $16,421  $873,559  $889,980 

 

$

3,381

 

$

946

 

$

5,292

 

$

9,619

 

$

1,048,704

 

$

1,058,323

 

  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 

Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is presented in the following tables (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 2020

 

 

 

 

 

Provision

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Allocation

 

Charge-offs

 

Recoveries

 

March 31, 2020

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

$

2,685

 

$

234

 

$

 —

 

$

16

 

$

2,935

Commercial

 

 

2,196

 

 

2,000

 

 

 —

 

 

44

 

 

4,240

Construction and land development

 

 

1,044

 

 

227

 

 

 —

 

 

83

 

 

1,354

Second mortgages

 

 

79

 

 

(10)

 

 

 —

 

 

 1

 

 

70

Multifamily

 

 

248

 

 

19

 

 

 —

 

 

 —

 

 

267

Agriculture

 

 

38

 

 

 7

 

 

 —

 

 

 —

 

 

45

Total real estate loans

 

 

6,290

 

 

2,477

 

 

 —

 

 

144

 

 

8,911

Commercial loans

 

 

1,980

 

 

582

 

 

(19)

 

 

 3

 

 

2,546

Consumer installment loans

 

 

114

 

 

35

 

 

(75)

 

 

37

 

 

111

All other loans

 

 

 7

 

 

 1

 

 

 —

 

 

 —

 

 

 8

Unallocated

 

 

38

 

 

205

 

 

 —

 

 

 —

 

 

243

Total loans

 

$

8,429

 

$

3,300

 

$

(94)

 

$

184

 

$

11,819

 

  Three Months Ended September 30, 2017 
  June 30, 2017  Provision
Allocation
  Charge-offs  Recoveries  September 30, 2017 
Mortgage loans on real estate:                    
Residential 1-4 family $3,797  $(444) $(73) $15  $3,295 
Commercial  1,783   897   (457)  14   2,237 
Construction and land development  1,383   (78)  (180)     1,125 
Second mortgages  33   9      2   44 
Multifamily  167   566         733 
Agriculture  21   (2)        19 
Total real estate loans  7,184   948   (710)  31   7,453 
Commercial loans  1,457   (193)  (265)  2   1,001 
Consumer installment loans  111   26   (86)  56   107 
All other loans  9   (4)        5 
Unallocated  728   (627)        101 
Total loans $9,489  $150  $(1,061) $89  $8,667 

14

 

  Three Months Ended September 30, 2016 
  June 30, 2016  Provision
Allocation
  Charge-offs  Recoveries  September 30, 2016 
Mortgage loans on real estate:                    
Residential 1-4 family $2,445  $739  $(202) $13  $2,995 
Commercial  3,572   (1,057)     21   2,536 
Construction and land development  1,577   (154)  (15)  1   1,409 
Second mortgages  46   (24)     2   24 
Multifamily  293   297         590 
Agriculture  25   (9)        16 
Total real estate loans  7,958   (208)  (217)  37   7,570 
Commercial loans  1,268   (392)        876 
Consumer installment loans  102   38   (31)  7   116 
All other loans  10   (3)        7 
Unallocated  96   815         911 
Total loans $9,434  $250  $(248) $44  $9,480 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

Provision

 

 

 

 

 

 

 

 

 

 

    

December 31, 2018

    

Allocation

    

Charge-offs

    

Recoveries

    

March 31, 2019

Mortgage loans on real estate:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential 1‑4 family

 

$

2,281

 

$

855

 

$

 —

 

$

203

 

$

3,339

Commercial

 

 

1,810

 

 

(32)

 

 

(277)

 

 

 7

 

 

1,508

Construction and land development

 

 

1,161

 

 

43

 

 

(12)

 

 

18

 

 

1,210

Second mortgages

 

 

20

 

 

40

 

 

 —

 

 

 2

 

 

62

Multifamily

 

 

371

 

 

(10)

 

 

 —

 

 

 —

 

 

361

Agriculture

 

 

17

 

 

 6

 

 

 —

 

 

 —

 

 

23

Total real estate loans

 

 

5,660

 

 

902

 

 

(289)

 

 

230

 

 

6,503

Commercial loans

 

 

1,894

 

 

291

 

 

(229)

 

 

 2

 

 

1,958

Consumer installment loans

 

 

152

 

 

72

 

 

(60)

 

 

24

 

 

188

All other loans

 

 

12

 

 

(6)

 

 

 —

 

 

 —

 

 

 6

Unallocated

 

 

1,265

 

 

(1,259)

 

 

 —

 

 

 —

 

 

 6

Total loans

 

$

8,983

 

$

 —

 

$

(578)

 

$

256

 

$

8,661

 

  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 

 

The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the possible economic impact COVID-19 may have on these borrowers.  The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

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

 

$

490

 

$

2,445

 

$

2,935

 

$

3,043

 

$

216,692

 

$

219,735

Commercial

 

 

24

 

 

4,216

 

 

4,240

 

 

3,229

 

 

407,209

 

 

410,438

Construction and land development

 

 

136

 

 

1,218

 

 

1,354

 

 

1,778

 

 

148,055

 

 

149,833

Second mortgages

 

 

 —

 

 

70

 

 

70

 

 

 —

 

 

5,954

 

 

5,954

Multifamily

��

 

 —

 

 

267

 

 

267

 

 

 —

 

 

76,206

 

 

76,206

Agriculture

 

 

 —

 

 

45

 

 

45

 

 

 —

 

 

7,038

 

 

7,038

Total real estate loans

 

 

650

 

 

8,261

 

 

8,911

 

 

8,050

 

 

861,154

 

 

869,204

Commercial loans

 

 

909

 

 

1,637

 

 

2,546

 

 

1,629

 

 

196,915

 

 

198,544

Consumer installment loans

 

 

 3

 

 

108

 

 

111

 

 

10

 

 

10,436

 

 

10,446

All other loans

 

 

 —

 

 

 8

 

 

 8

 

 

 —

 

 

1,035

 

 

1,035

Unallocated

 

 

 —

 

 

243

 

 

243

 

 

 —

 

 

 

 

 —

Total loans

 

$

1,562

 

$

10,257

 

$

11,819

 

$

9,689

 

$

1,069,540

 

$

1,079,229

 

  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 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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

 

$

380

 

$

2,305

 

$

2,685

 

$

2,981

 

$

220,557

 

$

223,538

Commercial

 

 

87

 

 

2,109

 

 

2,196

 

 

3,604

 

 

393,254

 

 

396,858

Construction and land development

 

 

11

 

 

1,033

 

 

1,044

 

 

376

 

 

146,190

 

 

146,566

Second mortgages

 

 

 —

 

 

79

 

 

79

 

 

 —

 

 

6,639

 

 

6,639

Multifamily

 

 

 —

 

 

248

 

 

248

 

 

2,463

 

 

70,515

 

 

72,978

Agriculture

 

 

 —

 

 

38

 

 

38

 

 

 —

 

 

8,346

 

 

8,346

Total real estate loans

 

 

478

 

 

5,812

 

 

6,290

 

 

9,424

 

 

845,501

 

 

854,925

Commercial loans

 

 

105

 

 

1,875

 

 

1,980

 

 

454

 

 

190,729

 

 

191,183

Consumer installment loans

 

 

 1

 

 

113

 

 

114

 

 

 7

 

 

11,156

 

 

11,163

All other loans

 

 

 —

 

 

 7

 

 

 7

 

 

 —

 

 

1,052

 

 

1,052

Unallocated

 

 

 —

 

 

38

 

 

38

 

 

 —

 

 

 

 

 —

Total loans

 

$

584

 

$

7,845

 

$

8,429

 

$

9,885

 

$

1,048,438

 

$

1,058,323

 

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$12.1 million and $15.8$12.7 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, 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 definedwell-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.  These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

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


16

The following tables present the composition of loans by credit quality indicator at September 30, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential 1‑4 family

 

$

210,368

 

$

8,135

 

$

1,232

 

$

 —

 

$

219,735

Commercial

 

 

357,877

 

 

50,505

 

 

2,056

 

 

 —

 

 

410,438

Construction and land development

 

 

143,507

 

 

4,548

 

 

1,778

 

 

 —

 

 

149,833

Second mortgages

 

 

5,257

 

 

697

 

 

 —

 

 

 —

 

 

5,954

Multifamily

 

 

76,206

 

 

 —

 

 

 —

 

 

 —

 

 

76,206

Agriculture

 

 

6,938

 

 

100

 

 

 —

 

 

 —

 

 

7,038

Total real estate loans

 

 

800,153

 

 

63,985

 

 

5,066

 

 

 —

 

 

869,204

Commercial loans

 

 

157,026

 

 

37,372

 

 

4,146

 

 

 —

 

 

198,544

Consumer installment loans

 

 

10,414

 

 

22

 

 

10

 

 

 —

 

 

10,446

All other loans

 

 

1,018

 

 

17

 

 

 —

 

 

 —

 

 

1,035

Total loans

 

$

968,611

 

$

101,396

 

$

9,222

 

$

 —

 

$

1,079,229

 

  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, 2019

 December 31, 2016 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 Pass  Special
Mention
  Substandard  Doubtful  Total 

    

Pass

    

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

 

$

219,210

 

$

2,964

 

$

1,364

 

$

 —

 

$

223,538

Commercial  330,851   3,168   5,785      339,804 

 

 

391,251

 

 

3,188

 

 

2,419

 

 

 —

 

 

396,858

Construction and land development  92,556   234   5,492      98,282 

 

 

145,782

 

 

408

 

 

376

 

 

 —

 

 

146,566

Second mortgages  7,474   437         7,911 

 

 

6,096

 

 

543

 

 

 —

 

 

 —

 

 

6,639

Multifamily  36,474      2,610      39,084 

 

 

70,515

 

 

 —

 

 

2,463

 

 

 —

 

 

72,978

Agriculture  7,067   118         7,185 

 

 

8,098

 

 

248

 

 

 —

 

 

 —

 

 

8,346

Total real estate loans  674,395   8,569   17,165      700,129 

 

 

840,952

 

 

7,351

 

 

6,622

 

 

 —

 

 

854,925

Commercial loans  122,129   5,879   1,292      129,300 

 

 

185,123

 

 

2,770

 

 

3,290

 

 

 —

 

 

191,183

Consumer installment loans  5,563   20   44      5,627 

 

 

11,140

 

 

16

 

 

 7

 

 

 —

 

 

11,163

All other loans  1,243            1,243 

 

 

1,052

 

 

 —

 

 

 —

 

 

 —

 

 

1,052

Total loans $803,330  $14,468  $18,501  $  $836,299 

 

$

1,038,267

 

$

10,137

 

$

9,919

 

$

 —

 

$

1,058,323

 

In accordance with FASB ASU 2011-02,Accounting Standards Update (ASU) 2011‑02, Receivables (Topic 310): A Creditor'sCreditor’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 2318 and 1725 loans that met the definition of a TDR as of September 30, 2017at March 31, 2020 and 2016,2019, 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 nine months ended September 30, 2016, the Company modified one residential 1-4 family loanMarch 31, 2020 and one consumer installment loan that were considered to be TDRs. The Company extended the term for the residential 1-4 family loan, which had a pre- and post-modification balance of $81,000 and $97,000, respectively. The Company extended the term and lowered the interest rate for the consumer installment loan, which had a pre- and post-modification balance of $248,000.2019.


A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three and nine months ended September 30, 2017 and 2016.March 31, 2020. During the three months ended March 31, 2019, one loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.6 million. 

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.

At September 30, 2017,March 31, 2020, the Company had 1-41‑4 family mortgages in the amount of $147.4$102.0 million pledged as collateral to the Federal Home Loan Bank withfor a lendable collateral valuetotal borrowing capacity of $124.0$86.2 million.

17

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30,310‑30, 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 1-41‑4 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, 2017March 31, 2020 and December 31, 2016,2019, the outstanding contractual balance of the PCI loans was $73.8$50.6 million and $81.1$53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 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

 

$

27,283

 

90.12

%  

$

29,465

 

90.58

%

Commercial  559   1.23   649   1.25 

 

 

474

 

1.57

 

 

490

 

1.51

 

Construction and land development  1,599   3.52   1,969   3.79 

 

 

1,136

 

3.75

 

 

1,172

 

3.60

 

Second mortgages  2,289   5.04   2,453   4.72 

 

 

1,157

 

3.82

 

 

1,169

 

3.59

 

Multifamily  258   0.56   270   0.52 

 

 

225

 

0.74

 

 

232

 

0.72

 

Total real estate loans  45,451   100.00   51,964   100.00 

 

 

30,275

 

100.00

 

 

32,528

 

100.00

 

Total PCI loans $45,451   100.00% $51,964   100.00%

 

$

30,275

 

100.00

%  

$

32,528

 

100.00

%

 

There was no activity in the allowance for loan losses on PCI loans for the three and nine months ended September 30, 2017March 31, 2020 and 2016.

2019.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at September 30, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

    

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

 

$

27,283

 

$

156

 

$

29,465

Commercial

 

 

 —

 

 

474

 

 

 —

 

 

490

Construction and land development

 

 

 —

 

 

1,136

 

 

 —

 

 

1,172

Second mortgages

 

 

 —

 

 

1,157

 

 

 —

 

 

1,169

Multifamily

 

 

 —

 

 

225

 

 

 —

 

 

232

Total real estate loans

 

 

156

 

 

30,275

 

 

156

 

 

32,528

Total PCI loans

 

$

156

 

$

30,275

 

$

156

 

$

32,528

 

  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 

18

 


The change in the accretable yield balance for the nine three months ended September 30, 2017March 31, 2020 and the year ended December 31, 2016,2019, 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, 2019

 

$

38,107

Accretion

 

 

(6,010)

Reclassification from nonaccretable difference

 

 

1,369

Balance, December 31, 2019

 

$

33,466

Accretion

 

 

(1,091)

Reclassification to nonaccretable difference

 

 

(509)

Balance, March 31, 2020

 

$

31,866

 

The PCI loans were not classified as nonperforming assets as of September 30, 2017,March 31, 2020, 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, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Residential 1‑4 family

 

$

21

 

$

21

Construction and land development

 

 

4,485

 

 

4,506

Total other real estate owned

 

$

4,506

 

$

4,527

 

  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,March 31, 2020, the Company had $3.2 million$434,000 in residential 1-41‑4 family loans and PCI loans that were in the process of foreclosure.

Note 6. Deposits

The following table provides interest bearing deposit information, by type, as of September 30, 2017at March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

Interest bearing checking

 

$

166,163

 

$

NOW

 

 

—  

 

 

170,532

MMDA

 

 

123,455

 

 

120,841

Savings

 

 

99,394

 

 

96,570

Time deposits less than or equal to $250,000

 

 

506,739

 

 

477,461

Time deposits over $250,000

 

 

136,980

 

 

119,460

Total interest bearing deposits

 

$

1,032,731

 

$

984,864

 

  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 

 

21Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

19

 

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, 2017March 31, 2020 and 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

 

 

Gain (Loss) on

 

Benefit

 

Cash Flow

 

Comprehensive

 

 

Securities

 

Pension Plan

 

Hedge

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,887

 

$

(886)

 

$

(36)

 

$

1,965

Other comprehensive income (loss) before reclassifications

 

 

610

 

 

 —

 

 

(435)

 

 

175

Amounts reclassified from AOCI

 

 

30

 

 

 —

 

 

 —

 

 

30

Net current period other comprehensive income (loss)

 

 

640

 

 

 —

 

 

(435)

 

 

205

Ending balance

 

$

3,527

 

$

(886)

 

$

(471)

 

$

2,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total 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)

 

$

(618)

 

$

(857)

 

$

196

 

$

(1,279)

Other comprehensive income (loss) before reclassifications  43   -   35   78 

 

 

1,719

 

 

 —

 

 

(74)

 

 

1,645

Amounts reclassified from AOCI  (31)  -   -   (31)

 

 

11

 

 

 —

 

 

 —

 

 

11

Net current period other comprehensive income (loss)  12   -   35   47 

 

 

1,730

 

 

 —

 

 

(74)

 

 

1,656

Ending balance $781  $(756) $10  $35 

 

$

1,112

 

$

(857)

 

$

122

 

$

377

 

  Three months ended September 30, 2016 
  Unrealized
Gain (Loss)
on Securities
  Defined
Benefit
Pension Plan
  Gain (Loss) on
Cash Flow
Hedge
  Total Other
Comprehensive
Income (Loss)
 
             
Beginning balance $3,530  $(901) $(578) $2,051 
Other comprehensive income (loss) before reclassifications  (322)  -   189   (133)
Amounts reclassified from AOCI  (58)  -   -   (58)
Net current period other comprehensive income (loss)  (380)  -   189   (191)
Ending balance $3,150  $(901) $(389) $1,860 

 

  Nine months ended September 30, 2017 
  Unrealized
Gain (Loss)
on Securities
  Defined
Benefit
Pension Plan
  Gain (Loss) on
Cash Flow
Hedge
  Total Other
Comprehensive
Income (Loss)
 
             
Beginning balance $(410) $(767) $(46) $(1,223)
Other comprehensive income (loss) before reclassifications  1,309   11   56   1,376 
Amounts reclassified from AOCI  (118)  -   -   (118)
Net current period other comprehensive income (loss)  1,191   11   56   1,258 
Ending balance $781  $(756) $10  $35 

  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 

The following table presentstables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 (dollars in thousands):

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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   

 

Three months ended

 

 

 September 30, 2017  September 30, 2016   

    

March 31, 2020

    

March 31, 2019

    

  

Securities available for sale:          

 

 

  

 

 

  

 

  

Unrealized gains on securities available for sale $(180) $(608) Gain on securities transactions, net
Related tax expense  62   206  Income tax expense

Unrealized loss on securities available for sale

 

$

39

 

$

14

 

Loss on securities transactions, net

Related tax benefit

 

 

(9)

 

 

(3)

 

Income tax expense

 $(118) $(402) Net of tax

 

$

30

 

$

11

 

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

20

 

• 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 termTable of the assets or liabilities.Contents

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 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.March 31, 2020.


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 salethe 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury securities

 

$

7,500

 

$

 —

 

$

7,500

 

$

 —

U.S. Government agencies

 

 

20,804

 

 

1,047

 

 

19,757

 

 

 —

State, county and municipal

 

 

102,189

 

 

3,573

 

 

98,616

 

 

 —

Mortgage backed securities

 

 

46,997

 

 

 —

 

 

46,997

 

 

 —

Asset backed securities

 

 

12,926

 

 

2,010

 

 

10,916

 

 

 —

Corporate bonds

 

 

12,295

 

 

6,365

 

 

5,930

 

 

 —

Total investment securities available for sale

 

 

202,711

 

 

12,995

 

 

189,716

 

 

 —

Total assets at fair value

 

$

202,711

 

$

12,995

 

$

189,716

 

$

 —

Cash flow hedge liability

 

$

601

 

 

 —

 

$

601

 

 

 —

Total liabilities at fair value

 

$

601

 

$

 —

 

$

601

 

$

 —

 

  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, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

21,936

 

$

 —

 

$

21,936

 

$

 —

State, county and municipal

 

 

98,592

 

 

10,072

 

 

88,520

 

 

 —

Mortgage backed securities

 

 

48,740

 

 

1,181

 

 

47,559

 

 

 —

Asset backed securities

 

 

11,604

 

 

 —

 

 

11,604

 

 

 —

Corporate bonds

 

 

6,097

 

 

 —

 

 

6,097

 

 

 —

Total investment securities available for sale

 

 

186,969

 

 

11,253

 

 

175,716

 

 

 —

Total assets at fair value

 

$

186,969

 

$

11,253

 

$

175,716

 

$

 —

Cash flow hedge liability

 

 

44

 

 

 —

 

$

44

 

 

 —

Total liabilities at fair value

 

$

44

 

$

 —

 

$

44

 

$

 —

 

  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).

21

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing companycompanies 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

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.

24

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, 2017March 31, 2020 and December 31, 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

 

$

4,341

 

$

 

$

 

$

4,341

Loans held for sale

 

 

2,470

 

 

 —

 

 

2,470

 

 

 —

Bank premises and equipment held for sale

 

 

1,589

 

 

 —

 

 

 —

 

 

1,589

Other real estate owned

 

 

4,506

 

 

 —

 

 

 —

 

 

4,506

Total assets at fair value

 

$

12,906

 

$

 —

 

$

2,470

 

$

10,436

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, 2019

 Total  Level 1  Level 2  Level 3 

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans $9,536  $  $2,168  $7,368 

 

$

3,020

 

$

 —

 

$

 

$

3,020

Loans held for sale

 

 

501

 

 

 —

 

 

501

 

 

 —

Bank premises and equipment held for sale

 

 

1,589

 

 

 —

 

 

 —

 

 

1,589

Other real estate owned  4,427      3,408   1,019 

 

 

4,527

 

 

 —

 

 

 —

 

 

4,527

Total assets at fair value $13,963  $  $5,576  $8,387 

 

$

9,637

 

$

 —

 

$

501

 

$

9,136

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, 2017March 31, 2020 and December 31, 2016,2019, 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/orand 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. WhenThe Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the fair value of the collateral is based on an observable market price or a current appraised value,collateral.  Therefore, 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 and there is no observable market price, the Company records the impaired loanloans as nonrecurring Level 3.  In instances where an appraisal received subsequentFor the period ended March 31, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. impaired loans were 27.5% and 12.8%, respectively.

22

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.

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. Initial fair value is based on appraised values of the collateral less estimated disposal costs.  Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. 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 valuesThe Company may incur additional write-downs of the collateral or management’s estimation of the value of the collateral. When theOREO assets to fair value of the collateral is based on an observableless estimated costs to sell if valuations indicate a further deterioration in market price or a current appraised value,conditions. As such, the Company records the foreclosed asset within Level 2. When an appraised value is not available or management determines that theOREO as a nonrecurring fair value of the collateral is further impaired below the appraised value due to such thingsmeasurement classified as absorption rates and market conditions, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.3.


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 suchrecognized on the consolidated balance sheet, at fair valuemeasures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

 

 

    

Estimated Fair

    

 

 

    

 

 

    

 

 

 

 

Carrying Value

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

$

24,649

 

$

25,485

 

$

 

$

25,485

 

$

            —

Loans, net of allowance

 

 

1,067,410

 

 

1,076,569

 

 

 —

 

 

 

 

1,076,569

PCI loans, net of allowance

 

 

30,119

 

 

38,091

 

 

 —

 

 

 

 

38,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

Interest bearing deposits

 

 

1,032,731

 

 

1,036,360

 

 

 —

 

 

1,036,360

 

 

 —

Borrowings

 

 

62,457

 

 

62,644

 

 

 —

 

 

62,644

 

 

 —

23

 

  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    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

 

 

    

Estimated Fair

    

 

 

    

 

 

    

 

 

 

 

Carrying Value

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

$

35,733

 

$

36,633

 

$

 

$

36,633

 

$

            —

Loans, net of allowance

 

 

1,049,894

 

 

1,041,671

 

 

 —

 

 

 

 

1,041,671

PCI loans, net of allowance

 

 

32,372

 

 

38,982

 

 

 —

 

 

 

 

38,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

Interest bearing deposits

 

 

984,864

 

 

985,853

 

 

 —

 

 

985,853

 

 

 —

Borrowings

 

 

72,624

 

 

72,457

 

 

 —

 

 

72,457

 

 

 —

 

  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).

26

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.

27

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, 2017March 31, 2020 and 20162019 (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 ended March 31, 2020

 

 

 

 

 

 

 

 

Basic EPS $2,416   22,041  $0.11 

 

$

1,415

 

22,400

 

$

0.06

Effect of dilutive stock awards     501    

 

 

 —

 

191

 

 

 —

Diluted EPS $2,416   22,542  $0.11 

 

$

1,415

 

22,591

 

$

0.06

            

 

 

 

 

 

 

 

 

For the three months ended September 30, 2016            

For the three months ended March 31, 2019

 

 

  

 

  

 

 

  

Basic EPS $2,458   21,935  $0.11 

 

$

3,503

 

22,141

 

$

0.16

Effect of dilutive stock awards     192    

 

 

 —

 

289

 

 

 —

Diluted EPS $2,458   22,127  $0.11 

 

$

3,503

 

22,430

 

$

0.16

            
For the nine months ended September 30, 2017            
Basic EPS $7,843   22,000  $0.36 
Effect of dilutive stock awards     491    
Diluted EPS $7,843   22,491  $0.35 
            
For the nine months ended September 30, 2016            
Basic EPS $7,196   21,902  $0.33 
Effect of dilutive stock awards     203    
Diluted EPS $7,196   22,105  $0.33 

 

ThereAntidilutive shares issuable under awards or options of 568,000 and 585,000 were no antidilutive exclusionsexcluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019, respectively.

Note 10. Employee Benefit Plan

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

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


 

24

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, 2017March 31, 2020 and 20162019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Three months ended

 

    

March 31, 2020

    

March 31, 2019

Interest cost

 

$

33

 

$

40

Expected return on plan assets

 

 

(54)

 

 

(53)

Amortization of prior service cost

 

 

 1

 

 

 1

Recognized net loss due to settlement

 

 

 —

 

 

13

Recognized net actuarial  loss

 

 

12

 

 

12

Net periodic (income) cost

 

$

(8)

 

$

13

 

  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, theThe Company entered into andesignates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had interest rate swapswaps designated as cash flow hedges with a total notional amountamounts of $30 million.$10 million at each of March 31, 2020 and December 31, 2019. 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 wasswaps were entered into with a counterparty that met the Company’s credit standards, and the agreement containsagreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contractcontracts is not significant. The Company had $390,000$530,000 and $180,000 of cash pledged as collateral for each of the periods ended September 30, 2017at March 31, 2020 and December 31, 2016.2019, 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 swapswaps 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 month periods ended March 31, 2020 and nine months ended September 30, 2017 and 2016.2019. The Company recorded a fair value liability of the Company’s cash flow hedge was an unrealized gain of $17,000 at September 30, 2017,$601,000 and was recorded$44,000 in other assets. The fair value of the Company’s cash flow hedge was an unrealized loss of $70,000liabilities at March 31, 2020 and December 31, 2016, and was recorded in other liabilities.2019, respectively. The gain and lossnet losses were recorded as a component of other comprehensive income 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.

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

25

 

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 months ended March 31, 2020 and 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31, 2020

 

March 31, 2019

Noninterest income

 

 

 

 

 

 

In-scope of Topic 606:

 

 

 

 

 

 

Service charges on deposit accounts

 

$

454

 

$

410

Interchange and ATM fees

 

 

218

 

 

199

Brokerage fees and commissions

 

 

72

 

 

96

Noninterest income (in-scope of Topic 606)

 

 

744

 

 

705

Noninterest income (out-of-scope of Topic 606)

 

 

591

 

 

309

Total noninterest income

 

$

1,335

 

$

1,014

 

Note 13. Leases

The Company accounts for leases in accordance with FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises.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 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 March 31, 2020 and December 31, 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 

 

  

 

 

  

Gross lease liability

 

$

8,968

 

$

9,278

Less: imputed interest

 

 

(2,455)

 

 

(2,541)

Present value of lease liability

 

$

6,513

 

$

6,737

The weighted average remaining lease term and weighted average discount rate for operating leases at March 31, 2020 was 12.1 years and 4.66%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2019 was 12.0 years and 4.63%, respectively.

Maturities of the gross operating lease liability at March 31, 2020 are as follows (dollars in thousands):

26

 

 

 

 

2020

    

$

921

2021

 

 

1,191

2022

 

 

600

2023

 

 

630

2024

 

 

573

Thereafter

 

 

5,053

Total of future payments

 

$

8,968

Operating lease costs and sublease rental income for the three months ended March 31, 2020 were $314,000 and $27,000, respectively.  Operating lease costs and sublease rental income for the three months ended March 31, 2019 were $330,000 and $27,000, respectively.

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, 2017March 31, 2020 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, 2017March 31, 2020 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-K10‑K for the year ended December 31, 2016.2019.

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2524 full-service offices, 18 of which are in Virginia and six of which are in Maryland.  The Bank also operates onetwo 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.

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 Insurancebank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, 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.

 

27

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 potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them

·

the interest rate environment;

·

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

·

real estate values;

·

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


·

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

·

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

·

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

·

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

·

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

·

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;

28

 

·

inflation;

technology; and

·

technology; and

·

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K10‑K for the year ended December 31, 20162019 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.

32

Allowance for Loan Losses on Loans

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

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

·

Residential 1-41‑4 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.

29

 

·

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 1-41‑4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

·

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

·

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

·

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


·

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

·

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

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

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

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

30

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 ASCFinancial 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 310-30310‑30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.


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

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income.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.

RESULTS OF OPERATIONS

Other Real Estate OwnedOverview

Coming off a strong end to the 2019 year, the Company began the first quarter of 2020 with good momentum but the quarter was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis.  Specific events that

31

 

impacted the Company’s financial results 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 lowerend of the carrying amount orfirst quarter, and will impact future financial results, include government mandated business closures and stay-at-home orders, which have transformed into 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 takenhighest unemployment rate seen in the Company’s tax returns may be subjectmarkets.  In addition, unprecedented government stimulus programs and the uncertainties regarding how long the mandates will last have contributed 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 knowledgeunpredictability 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 periodfinancial impacts 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.may experience.  The Company had no interest or penalties duringis focused on assessing the threerisks in its loan portfolio 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 gainsworking with our customers to minimize future losses.  See below for additional discussion regarding trends and the potential 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

OverviewCOVID-19. 

 

Net income was $2.4$1.4 million for the thirdfirst quarter of 2017,2020, compared with net income of $2.5$3.5 million in the thirdfirst quarter of 2016.2019.  Earnings per common share, basic and fully diluted, were $0.11$0.06 per share and $0.16 per share for each of the three months ended September 30, 2017March 31, 2020 and 2016.


Net income was $7.8 million for the nine months ended September 30, 2017 versus net income of $7.2 million for the same period in 2016. Basic earnings per common share were $0.36 per share and $0.33 per share for the 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 2016,2019, respectively.

 

The decrease of $2.1 million, or 59.6%, in net income, for the first quarter of 2020 compared with the first quarter of 2019 was primarily the result of a provision for loan losses of $3.3 million in the first quarter of 2020 to reflect the business and market disruptions with respect to COVID-19. Additional discussion of the provision is presented below. Offsetting the decrease to net income were a decrease of $532,000 in income tax expenses, an increase of $321,000 in noninterest income, a decrease of $246,000 in noninterest expenses and an increase of $113,000 in net interest income.

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,$113,000, or 5.0%0.9%, from the first quarter of 2019 to the first quarter of 2020. Net interest income was $12.2 million in the first quarter of 2020 compared with $12.1 million for the same period in 2019.  Interest and dividend income increased $140,000, or 0.9%, over this time period. Interest and fees on loans increased by $667,000. This increase was mitigated by securities income, which declined $304,000, interest and fees on PCI loans, which declined $196,000, and interest on deposits in other banks, which decreased by $27,000. Interest on PCI loans was $1.1 million in the first quarter of 2020 compared with $1.3 million in the first quarter of 2019.  The average balance of the PCI portfolio declined $6.5 million during the year-over-year comparison period. The increase in interest and fees on loans was generated by an increase of $66.2 million, or 6.6%, in the average balance of loans. A portion of this loan growth was a shift in the mix of earning assets, as securities average balances declined $21.9 million year over year. The average balance of total earning assets increased $40.1 million, or 3.1%, from the thirdfirst quarter of 20162019 to the thirdfirst quarter of 2017 and was $11.0 million.2020. The yield on earning assets of 4.51%decreased from 4.95% in the thirdfirst quarter of 2017 was a slight increase from 4.50%2019 to 4.78% in the thirdfirst quarter of 2016. Yield2020. The yield on earning assets was the culmination of decreases in the 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 2016 interest income of $9.2 million. Interest on PCI loans was $1.4 million5.36% in the thirdfirst quarter of 2017, a decrease of $126,000 year over year. The return on PCI loans increased over this time frame, from 11.32%2019 to 11.76%. Income on securities of $1.8 million5.19% in the thirdfirst quarter of 2017 represented an increase of $93,000 year over year as a result of an increase of $15.2 million in2020, the average balance of securities. The tax-equivalent yield on securities, was 3.10%from 3.35% in the thirdfirst quarter of each2019 to 3.08% in the first quarter of 20172020, and 2016.the yield on interest bearing bank balances, from 2.70% to 1.68% year over year. 

 

Interest expense increased $459,000,$27,000, or 24.1%0.7%, when comparing the thirdfirst quarter of 20172019 and the thirdfirst quarter of 2016.2020. Interest expense on deposits increased $503,000,$185,000, or 32.5%5.7%, as the average balance of interest bearing deposits increased $103.4$20.5 million, or 12.4%2.0%. This growth was primarily comprised of an increase of $9.2 million in the average balance of time deposits, which averaged $632.7 million in the first quarter of 2020. Interest-bearing demand deposits increased $12.5 million year over year and were $170.3 million, on average, in the first quarter of 2020. Offsetting these increases was a decrease in the average balance of savings and money market accounts of $1.3 million, to $219.7 million for the first quarter of 2020. The shift in deposit balances increased the cost of interest bearing deposits from 1.31% in the first quarter of 2019 to 1.34% in the first quarter of 2020.

FHLB and other borrowings decreased, on average, $6.4 million year over year, and there was a decrease in the rate paid, from 2.17% in the first quarter of 2019 to 1.58% in the first quarter of 2020. Overall, the Bank’s cost of interest bearing liabilities increaseddecreased two basis points, from 0.79%1.38% in the thirdfirst quarter of 20162019 to 0.92%1.36% in the thirdfirst quarter of 2017. While average interest bearing deposit costs increased from 0.74% in the third quarter of 2016 to 0.87% in the third 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.2020.

 

32

The tax equivalenttax-equivalent net interest margin decreased 813 basis points, from 3.82%3.81% in the thirdfirst quarter of 20162019 to 3.74%3.68% in the thirdfirst quarter of 2017.2020. Likewise, the interest spread decreased from 3.71%3.57% to 3.59%3.42% over the same time period.  The decrease in the margin was precipitated by an increasea greater decrease in the yield on earning assets of 16.5%17 basis points compared with a decline in the cost of interest bearing labilities.

For the first nine monthsliabilities of 2017, net interest income increased $2.0 million, or 6.5%, and was $32.9 million. The tax-equivalent yield on earning assets was 4.55% for the first nine months of 2017 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 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.only two basis points.

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

The tax equivalent net interest margin was 3.80% for the first nine months of 2017 compared with 3.82% for the first nine months of 2016. The net interest spread was 3.66% for the first nine months of 2017 versus 3.72% for the first nine months of 2016.


 

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, 2017March 31, 2020 and 2016.2019. The tabletables also setsset 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, 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 34%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended March 31, 2020

    

Three months ended March 31, 2019

    

 

 

 

 

 

 

 

 

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

 

$

1,065,268

 

$

13,086

 

4.93

%  

$

999,047

 

$

12,419

 

5.04

%  

PCI loans

 

 

31,311

 

 

1,097

 

13.87

 

 

37,783

 

 

1,293

 

13.69

 

Total loans

 

 

1,096,579

 

 

14,183

 

5.19

 

 

1,036,830

 

 

13,712

 

5.36

 

Interest bearing bank balances

 

 

16,455

 

 

69

 

1.68

 

 

14,376

 

 

96

 

2.70

 

Federal funds sold

 

 

141

 

 

 —

 

1.06

 

 

55

 

 

 —

 

2.41

 

Securities (taxable)

 

 

182,340

 

 

1,351

 

2.96

 

 

186,370

 

 

1,522

 

3.27

 

Securities (tax exempt) (1)

 

 

49,391

 

 

435

 

3.52

 

 

67,211

 

 

603

 

3.59

 

Total earning assets

 

 

1,344,906

 

 

16,038

 

4.78

 

 

1,304,842

 

 

15,933

 

4.95

 

Allowance for loan losses

 

 

(8,621)

 

 

  

 

  

 

 

(9,084)

 

 

  

 

  

 

Non-earning assets

 

 

105,540

 

 

  

 

  

 

 

96,770

 

 

  

 

  

 

Total assets

 

$

1,441,825

 

 

  

 

  

 

$

1,392,528

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand - interest bearing

 

$

170,279

 

 

94

 

0.22

 

$

157,773

 

 

87

 

0.22

 

Savings and money market

 

 

219,661

 

 

280

 

0.51

 

 

220,945

 

 

293

 

0.54

 

Time deposits

 

 

632,664

 

 

3,045

 

1.93

 

 

623,417

 

 

2,854

 

1.86

 

Total interest bearing deposits

 

 

1,022,604

 

 

3,419

 

1.34

 

 

1,002,135

 

 

3,234

 

1.31

 

Short-term borrowings

 

 

4,185

 

 

23

 

2.20

 

 

6,837

 

 

50

 

2.94

 

FHLB and other borrowings

 

 

66,796

 

 

266

 

1.58

 

 

73,214

 

 

397

 

2.17

 

Total interest bearing liabilities

 

 

1,093,585

 

 

3,708

 

1.36

 

 

1,082,186

 

 

3,681

 

1.38

 

Noninterest bearing deposits

 

 

175,871

 

 

  

 

  

 

 

160,496

 

 

  

 

  

 

Other liabilities

 

 

14,184

 

 

  

 

  

 

 

9,974

 

 

  

 

  

 

Total liabilities

 

 

1,283,640

 

 

  

 

  

 

 

1,252,656

 

 

  

 

  

 

Shareholders’ equity

 

 

158,185

 

 

  

 

  

 

 

139,872

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,441,825

 

 

  

 

  

 

$

1,392,528

 

 

  

 

  

 

Net interest earnings

 

 

  

 

$

12,330

 

  

 

 

  

 

$

12,252

 

  

 

Interest spread

 

 

  

 

 

  

 

3.42

%  

 

  

 

 

  

 

3.57

%  

Net interest margin

 

 

  

 

 

  

 

3.68

%  

 

  

 

 

  

 

3.81

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Securities

 

 

  

 

$

92

 

  

 

 

  

 

$

127

 

  

 

 

37

(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%.

38

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

33

of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

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

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

The Company recordedrecords a $150,000separate provision for loan losses duringfor its loan portfolio, excluding PCI loans, and the three and nine months ended September 30, 2017.PCI loan portfolio.  There was noa provision for loan losses on the PCI loan portfolio, duringexcluding PCI loans, of $3.3 million for the three and nine months ended September 30, 2017 and 2016. The Company recorded afirst quarter of 2020. This compares with no provision for loan losses in the amountfirst quarter of $250,0002019.

The provision recorded in the first quarter of 2020 was due to the heightened risks associated with the loan portfolio that resulted from the economic impact of the rapidly evolving effects of the COVID-19 stay-at-home orders, business shut-downs and $450,000increased unemployment. The Company’s lenders reviewed each loan within the portfolio to identify those borrowers that management believed to be possibly impacted by the current state of the economy. Loans identified with increased risk were aggregated by loan type. This analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to the three and nine months ended September 30, 2016. The $150,000 provision for loan losses for the quarter.

Due to the COVID-19 pandemic the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory.  As of March 31, 2020, the Company identified the following categories of borrowers as being potentially at risk:

Category

% of Total Loans

Consumer

19.6

%

Lessors of commercial properties

15.7

Lessors of residential properties

12.2

Hotels and other lodging

4.8

Medical and care services

4.5

Food service and drinking

2.2

Retail stores

1.3

Personal services

1.0

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19.  To date, the Company has granted relief in the thirdform of various types of payment concessions, including interest only for up to six months or payment deferrals up to the same time frame for loans with outstanding balances of $141.2 million.  In accordance with current regulatory guidance, none of these loans were deemed to be TDRs, as they were all current under their terms as of December 31, 2019. 

The Company is also helping its customers and communities by participating in the Paycheck Protection Program (PPP).  As of May 6, 2020, the Company has successfully received Small Business Administration (SBA) approval for 631 loans totaling $83.1 million, with the median size for all loans made being approximately $42,000.

With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the first quarter of 2017 was to provide2020 or the required levelfirst quarter 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. Additional discussion of loan quality is presented below.

 

There wereThe loan portfolio, excluding PCI loans, had net charge-offsrecoveries of $972,000$90,000 in the thirdfirst quarter of 2017,2020, compared with net charge-offs of $204,000$322,000 in the thirdfirst quarter of 2016.2019. Total charge-offs were $1.1 million$94,000 for the thirdfirst quarter of 20172020 compared

34

with $248,000$578,000 in the thirdfirst quarter of 2016.2019. Recoveries of previously charged-off loans were $89,000$184,000 for the thirdfirst quarter of 20172020 compared with $44,000$256,000 in the thirdfirst quarter of 2016.

There were net charge-offs of $976,000 for the nine months ended September 30, 2017, compared with net charge-offs of $529,000 for the nine months ended September 30, 2016.  Total charge-offs were $1.4 million for the nine months ended September 30, 2017 compared with $801,000 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 compared with $272,000 for the nine months ended September 30, 2016.

Noninterest Income

2019.

Noninterest Income

Noninterest income decreased $180,000, or 13.4%, fromof $1.3 million in the thirdfirst quarter of 2016 to the third quarter of 2017. Mortgage loan income decreased $193,000. Gains on securities transactions were $48,000 in the third quarter of 2017, as compared with $88,000 in the third quarter of 2016, a decrease of $40,000. Offsetting these decreases2020 was an increase of $61,000 in service charge income.

Noninterest income was $3.5 million for$321,000, or 31.7%, over the first nine monthsquarter of 2017 compared with $4.1 million for the first nine months of 2016, a decrease of $555,000, or 13.7%.2019. Mortgage loan income decreased $436,000,increased $159,000, or 256.5%, from $599,000$62,000 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 shifted2019 to a platform that requires lower overhead but has equivalent or better net revenue potential. Securities gains of $180,000$221,000 in the first three quartersquarter of 20172020.Other noninterest income was $296,000 in the first quarter of 2020 compared with $608,000 for the same period$176,000 in 2016. Securities were sold during 2016 to fund a portion of the Bank’s loan growth, while in 2017 much of the loan growth has been funded with deposit balance growth. Offsetting these decreases for the first nine monthsquarter of 2017 compared2019. The increase of $120,000 was primarily the result of a $64,000 gain on extinguishment of an FHLB borrowing combined with the same period$90,000 in 2016 were increases of $226,000swap fee income, offset by a $24,000 decrease in servicebrokerage fees and commissions.  Service charges on deposit accounts $74,000of $672,000 in the first quarter of 2020 increased by $63,000, or 10.3%, year over year. This increase was primarily the result of an increase of $15.4 million in the average balance of noninterest bearing deposits and $12.5 million in interest-bearing demand deposits. However, the Company expects lower levels of service charge income in the next quarter due to higher levels of waived fees and an overall decrease in transaction volume arising from the economic impact of COVID-19. Offsetting these increases in noninterest income year over year were decreases of $25,000 in losses on securities transactions and $7,000 in income on bank owned life insurance and $9,000 in other noninterest income.insurance.


Noninterest Expense

Noninterest expenses increased $428,000,decreased $246,000, or 5.2%2.8%, when comparing the thirdfirst quarter of 20172020 to the same period in 2016. Other operating2019. The largest component of the change was a reduction of $229,000 in salaries and employee benefits. During 2019, two branch offices were closed, which in turn reduced the number of full-time equivalent employees in 2020 compared with 2019. These closures also lowered occupancy expenses increased $325,000. Salariesyear over year, which declined $103,000, from $930,000 in the first quarter of 2019 to $827,000 in the first quarter of 2020. The Company expects a significant decrease in salaries and employee benefits increased $322,000, occupancyin the next quarter as a result of loan cost deferrals related to the over 400 PPP loans processed to date.  FDIC assessment of $125,000 in the first quarter of 2020 was a year-over-year decrease of $25,000. Offsetting these decreases were an increase in other operating expenses increased $101,000, andof $82,000, an increase of $24,000 in data processing expenses and an increase of $14,000 in other real estate expenses, net.

Income Taxes

Income tax expense was $264,000 for the three months ended March 31, 2020, compared with income tax expense $796,000 for the first quarter of 2019.  The effective tax rate for the first quarter of 2020 was 15.7% compared with 18.5% for the first quarter of 2019.  The decrease in the effective tax rate is a product of a higher percentage of tax free municipal income along with tax credits representing a higher percentage of overall tax expense for the first quarter of 2020.  

FINANCIAL CONDITION

General

Total assets increased $91,000.$22.7 million, or 1.6%, to $1.454 billion at March 31, 2020 when compared to December 31, 2019. Total loans, excluding PCI loans, were $1.079 billion at March 31, 2020, increasing $20.9 million, or 2.0%, from year end 2019. Total PCI loans were $30.3 million at March 31, 2020 versus $32.5 million at December 31, 2019.

Commercial real estate loans, the largest category of loans at $410.4 million, or 38.0% of gross loans outstanding, increased $13.6 million during the first quarter of 2020. Commercial loans grew $7.4 million and were $198.5 million at March 31, 2020. Multifamily loans, totaling $76.2 million, or 7.1% of total loans, increased $3.2 million during the first quarter of 2020. Construction and land development loans, totaling $149.8 million, grew by $3.3 million, or 2.2%. Residential 1 – 4 family loans declined by $3.8 million and ended the period at $219.7 million, or 20.4% of the portfolio. Agriculture loans secured by real estate declined by $1.3 million, or 15.7%, and totaled $7.0 million at March 31, 2020. Consumer installment loans decreased $717,000 during the first quarter of 2020, and second mortgages decreased $685,000 during the period.

35

The Company’s securities portfolio, excluding restricted equity securities, increased $4.7 million since year end 2019 to $227.4 million at March 31, 2020. U.S. Treasury issues increased by $7.5 million during the first quarter of 2020. Corporate securities increased by $6.2 million during the period, while state, county and municipal securities available for sale increased by $3.6 million. Offsetting these increases was a decrease year-over-year of $415,000$10.0 million in amortizationU.S. Government agency securities held to maturity.  Net losses 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 million for the first nine months of 2017, as compared with $24.5 million for the same period in 2016. This is an increase of $1.2 million, or 4.7%. Salaries and employee benefits increased $718,000, or 5.2%, in the first nine months of 2017 compared with the same period in 2016. Other operating expenses increased $366,000 over the comparison period. Occupancy expenses increased $286,000, data processing fees increased $236,000, other real estate expenses increased $187,000 and equipment expenses increased $120,000. Offsetting these increases were decreases in amortization of intangibles, which declined $552,000, and FDIC assessment, which declined $206,000. The increases in noninterest expenses in the first nine months of 2017 compared with the same period in 2016 are primarily a reflection of the branch expansion activity that has occurred in 2016 and 2017. The Bank has opened four new branches over the course of 2016 and 2017. Credit expenses also increased $137,000 from the first nine months of 2016 to the same period in 2017.

Income Taxes

Income tax expense was $919,000 for the three months ended September 30, 2017 compared with an income tax expense of $862,000 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. 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, income tax expense was $2.7 million, or an effective rate of 27.5%. The lower rate in 2017 was primarily the result of the exercise of stock options by employees, which reduced income tax expense, as required by a recently adopted GAAP standard.

FINANCIAL CONDITION

General

Total assets increased $44.3 million, or 3.5%, to $1.294 billion at September 30, 2017 as compared with $1.250 billion at December 31, 2016. Total loans were $890.0 million at September 30, 2017, increasing $53.7 million, or 6.4%, from year end 2016.  Total PCI loans were $45.5 million at September 30, 2017 versus $52.0 million at December 31, 2016.

During the first nine months of 2017, residential 1-4 family loans grew $21.9 million, or 10.5%. Of this amount, $15.7 million was a pool of in-market mortgages purchased in late third quarter of 2017. Multifamily loans grew $14.6 million, or 37.2%, commercial loans grew $7.3 million, or 5.7%, commercial mortgage loans on real estate grew $6.0 million, or 1.8%, and construction and land development loans grew $4.3 million, or 4.4%.

The Company’s securities portfolio, excluding equity securities, declined $5.8 million, or 2.2%, from $262.7 million at December 31, 2016 to $256.9 million at September 30, 2017. Net realized gains of $180,000$39,000 were recognized during the first nine monthsquarter of 2017 through sales and call activity, as2020 compared with $608,000 recognized during$14,000 in net losses in the first nine monthsquarter of 2016.2019. The decline inCompany actively manages the volume of securities was a strategic decision by managementportfolio to fund strong loan growth with securities sales. Also, there were normal securities amortization, call activity, salesimprove its liquidity and maturities.maximize the 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-saleavailable for sale (AFS) under FASB ASC 320,Investments – Debt and Equity Securities. The marketfair value of the AFS portfolio was $210.4$202.7 million at September 30, 2017March 31, 2020 and $216.1$187.0 million at December 31, 2016.2019. At September 30, 2017,March 31, 2020, the Company had a net unrealized gain on the AFS portfolio of $1.2$4.5 million compared with a net unrealized lossgain of $621,000$3.7 million at December 31, 2016.2019. Municipal securities comprised 59.1%50.4% of the total AFS portfolio at September 30, 2017.March 31, 2020. 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$30.4 million and $21.1$28.7 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.  There were federal funds sold of $144,000 at September 30, 2017 and federal funds purchased of $4.7$24.4 million at December 31, 2016.2019 with no federal funds purchased or sold at March 31, 2020.  Interest bearing bank balances were $15.0 million at March 31, 2020 compared with $11.7 million at December 31, 2019.

 

Interest bearing deposits at September 30, 2017March 31, 2020 were $933.1 million,$1.033 billion, an increase of $24.6$47.9 million, or 2.7%4.9%, from $908.4 million at December 31, 2016. MMDA balances have2019. Time deposits less than or equal to $250,000 increased $33.1by $29.3 million, or 29.7%6.1%, during 2017, the resultfirst quarter of promotions at new branches. This growth has enabled management to allow brokered2020, the largest increase in the deposit balancescategories.  There were also increases of $38.9$17.5 million, to mature and run-off. As a result,or 14.7%, in time deposits over $250,000, $2.8 million in savings account balances and $2.6 million in money market deposit accounts. Interest-bearing checking accounts (formerly NOW accounts) declined $9.9$4.4 million or 7.7%.during the first quarter of 2020 and were the only deposit category to decline. Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

 

FHLB advances were $81.3$58.3 million at September 30, 2017,March 31, 2020, compared with $81.9$68.5 million at December 31, 2016. Long term debt was $0 at September 30, 20172019. The decrease of $10.2 million in FHLB advances and $1.7$24.4 million at December 31, 2016. This borrowing, initially in the amount of $10.7 million, was obtainedFederal funds purchased 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 2017.2020 was replaced with strong retail deposit growth of $57.6 million.   

 

Shareholders’ equity was $124.4$155.5 million at September 30, 2017March 31, 2020 and $114.5$155.5 million at December 31, 2016. Shareholders’2019. The ratio of shareholders equity increased $9.9 million, or 8.6%, from year end 2016 due to an increaseassets was 10.7% at March 31, 2020 and 10.9% at December 31, 2019.  On January 22, 2020, the Company announced a share repurchase program of $1.3 million in other comprehensive income relatedup to net unrealized gains related to1,000,000 shares of its common stock. During the investment portfoliofirst quarter of 2020, the Company repurchased 115,800 shares of common stock at a total cost of $809,000. The Company evaluates the value of the common stock and cash flow hedge, an increase of $786,000 in additional paid in capital for regulatory purposes when considering repurchases under the program and, net income of $7.8 millionas a result, is not currently making any repurchases in the first nine months of 2017.current economic environment.

 

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

36

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$9.7 million at September 30, 2017March 31, 2020 and net charge-offsrecoveries were $976,000$90,000 for the ninethree months ended September 30, 2017.March 31, 2020. This compares with nonperforming assets of $14.7$10.8 million and net charge-offs of $516,000 at and$879,000 for the year ended December 31, 2016.2019.

NonperformingNonaccrual loans were $12.7$5.2 million at September 30, 2017,March 31, 2020, a $2.4 million increase$120,000 decrease from $10.2$5.3 million at December 31, 2016.2019. The $2.4 million increase$120,000 decrease in nonperformingnonaccrual loans since December 31, 20162019 was the net result of $7.0$3.1 million in additions to nonperformingnonaccrual loans and $4.6$3.2 million in reductions. The increase related mainly to one construction and land development relationship totaling $1.4 million and two commercial loans totaling $1.3 million. With respect to the reductions in nonperformingnonaccrual loans, $1.1 million$47,000 were payments to existing credits, $1.2$22,000 were charge-offs, $3.0 million were charge-offs, $926,000 were loanspaid off, and $159,000 returned to accruing status, $23,000 were loans transferred to OREO, and $1.4 million paid off.

status.

The allowance for loan losses, excluding PCI, equaled 68.37%228.5% of nonaccrual loans at September 30, 2017March 31, 2020 compared with 92.68%159.3% at December 31, 2016.2019. The ratio of nonperforming assets to loans and OREO continued to decline.decreased 12 basis points. The ratio was 1.72%0.89% at September 30, 2017March 31, 2020 versus 1.74%1.01% at December 31, 2016.2019.

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, 2017March 31, 2020 and December 31, 2016,2019, total impaired loans, excluding PCI loans, equaled $18.0$9.7 million and $18.5$9.9 million, respectively.

37

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.


 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

Nonaccrual loans

 

$

5,172

 

$

5,292

 

Loans past due 90 days and accruing interest

 

 

 —

 

 

946

 

Total nonperforming loans

 

 

5,172

 

 

6,238

 

OREO

 

 

4,506

 

 

4,527

 

Total nonperforming assets

 

$

9,678

 

$

10,765

 

 

 

 

 

 

 

 

 

Accruing troubled debt restructure loans

 

$

4,517

 

$

4,593

 

 

 

 

 

 

 

 

 

Balances

 

 

  

 

 

  

 

Specific reserve on impaired loans

 

 

1,562

 

 

584

 

General reserve related to unimpaired loans

 

 

10,257

 

 

7,845

 

Total allowance for loan losses

 

 

11,819

 

 

8,429

 

 

 

 

 

 

 

 

 

Average loans during the year, net of unearned income

 

 

1,065,268

 

 

1,023,861

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

9,689

 

 

9,885

 

Non-impaired loans

 

 

1,069,540

 

 

1,048,438

 

Total loans, net of unearned income

 

 

1,079,229

 

 

1,058,323

 

 

 

 

 

 

 

 

 

Ratios

 

 

  

 

 

  

 

Allowance for loan losses to loans

 

 

1.10

%  

 

0.80

%

Allowance for loan losses to nonaccrual loans

 

 

228.52

 

 

159.28

 

General reserve to non-impaired loans

 

 

0.96

 

 

0.75

 

Nonaccrual loans to loans

 

 

0.48

 

 

0.50

 

Nonperforming assets to loans and OREO

 

 

0.89

 

 

1.01

 

Net charge-offs (recoveries) to average loans

 

 

(0.01)

 

 

0.09

 

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 SeptemberMarch 30, 20172020 and December 31, 20162019 is below (dollars in thousands):

 

 

 

 

 

 

 

 September 30, 2017  December 31, 2016 

    

March 31, 2020

    

December 31, 2019

 

Mortgage loans on real estate:        

 

 

 

 

 

 

 

Residential 1-4 family $2,140  $2,893 

Residential 1‑4 family

 

$

1,456

 

$

1,378

 

Commercial  3,492   1,758 

 

 

657

 

 

1,006

 

Construction and land development  4,283   5,495 

 

 

1,778

 

 

376

 

Agriculture  66    

Multifamily

 

 

 —

 

 

2,463

 

Total real estate loans  9,981   10,146 

 

 

3,891

 

 

5,223

 

Commercial loans  2,666   53 

 

 

1,270

 

 

62

 

Consumer installment loans  30   44 

 

 

11

 

 

 7

 

Total loans $12,677  $10,243 

 

$

5,172

 

$

5,292

 

 

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 inAllowance for Loan Losses on Loans in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 18 months and/or deemed to be invalid. The Company uses a ratio analysis for balances less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

Asset Quality – PCI loans

Loans accounted for under FASB ASC 310-30310‑30 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 includeincludes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash

38

flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairmentimpairments 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.

Current repurchase activity under the Company’s stock repurchase program was suspended effective April 2, 2020.  The sole reason for this suspension was due to the uncertainties surrounding COVID-19.  The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers.

Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength.

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 threefour 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’sBank’s ratio of total risk-based capital was 13.4%13.9% at September 30, 2017 compared with 13.2% ateach of March 31, 2020 and December 31, 2016.2019. The tier 1 risk-based capital ratio was 12.6%12.9% at September 30, 2017March 31, 2020 and 12.2%13.2% at December 31, 2016.2019. The Company’sBank’s tier 1 leverage ratio was 10.0%10.9% at September 30, 2017March 31, 2020 and 9.6%11.0% at December 31, 2016.2019. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 12.2%12.9% at September 30, 2017March 31, 2020 and 11.8%13.2% at December 31, 2016.

2019.

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 CompanyBank 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,March 31, 2020, the CompanyBank had a capital conservation buffer of 5.4%, well above the 2017 required buffer of 1.25%5.9%.

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

39

management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at September 30, 2017March 31, 2020 and December 31, 20162019 was as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

Cash and due from banks

 

$

15,406

 

$

16,976

 

Interest bearing bank deposits

 

 

14,960

 

 

11,708

 

Available for sale securities, at fair value, unpledged

 

 

173,170

 

 

157,225

 

Total liquid assets

 

$

203,536

 

$

185,909

 

 

 

 

 

 

 

 

 

Deposits and other liabilities

 

$

1,298,072

 

$

1,275,361

 

Ratio of liquid assets to deposits and other liabilities

 

 

15.68

%  

 

14.58

%

 

  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%

44

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 March 31, 2020.

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, 2017March 31, 2020 and December 31, 2016,2019, 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 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Commitments with off-balance sheet risk:

 

 

  

 

 

  

Commitments to extend credit

 

$

220,070

 

$

210,086

Standby letters of credit

 

 

15,269

 

 

15,155

Total commitments with off-balance sheet risks

 

$

235,339

 

$

225,241

 

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, theThe Company entered into an interestdesignates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate swapborrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had cash flow hedges with a total notional amountamounts of $30 million.  The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate$10 million at each 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 at September 30, 2017March 31, 2020 and December 31, 2016, respectively, which was2019.  The Company recorded a fair value liability of $601,000 and $44,000 in other assetsliabilities, at March 31, 2020 and other liabilities, respectively.December 31, 2019, respectively.  The Company’s cash flow hedge ishedges are deemed to be highly effective. Therefore, the gain and loss wasnet losses were recorded as a component of other comprehensive income recorded(loss) in the Company’s Consolidated Statementsconsolidated statements of Comprehensive Income.comprehensive income.

40

 

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-month12‑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, 2017March 31, 2020 (dollars in thousands):

 

 

 

 

 September 30, 2017 

 

March 31, 2020

 %  $ 

    

%

    

$

Change in Yield curve        

 

 

 

 

+400 bp  0.2   91 

 

5.6

 

2,730

+300 bp  0.2   90 

 

4.0

 

1,943

+200 bp  0.2   70 

 

2.0

 

976

+100 bp  0.1   45 

 

0.4

 

184

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

 

0.1

 

42

‑200 bp

 

 —

 

(5)

‑300 bp

 

(0.1)

 

(33)

‑400 bp

 

(0.1)

 

(33)

 

At September 30, 2017,March 31, 2020, 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%5.6%. 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%0.1%. 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.

41

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. Furthermore, the Company has seen no effect on internal control over financial reporting related to its change to a mostly remote workforce due to COVID-19.  

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 wereThere are no material changes to any of the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019 (Part I, Item 1A), other than the addition of the risk factor relating to the COVID-19 pandemic as set forth below.

 

42

Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The coronavirus (COVID-19) pandemic, including measures that governmental authorities have taken to manage the public health effects of the pandemic, has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. These measures, together with voluntary changes in consumer behavior, have led to a substantial decrease in economic activity and a dramatic increase in unemployment. We cannot predict at this time the extent to which COVID-19 will continue to negatively affect us. The extent of any continued or future adverse effects of COVID-19 will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers and service providers, as well as other market participants, and additional actions taken by governmental authorities and other third parties in response to the pandemic.

We are prioritizing the safety of our customers and employees and have limited our branch activity to drive-through services or in-branch appointments. In addition, most of our employees are working remotely.  If these measures are not effective in serving our customers or affect the productivity of our employees, they may lead to significant disruptions in our business operations.

Many of our third-party service providers have also been, and may further be, affected by the same factors that affect us and that, in turn, increase their own risks of business disruption or may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.

We are offering varying levels of credit relief to borrowers who are experiencing financial hardships related to COVID-19, including interest only payment concessions and payment deferrals. In addition, we are a certified and qualified SBA lender and are assisting our customers with their applications for the Paycheck Protection Program. These assistance efforts may adversely affect our revenue and results of operations. These government programs are complex, and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. In addition, if these assistance efforts are not effective in mitigating the effects of COVID-19 on borrowers, we may experience higher rates of default and increased credit losses in future periods.

Certain concentrations where we have credit exposure, including commercial and residential lessors, hotels, medical service providers and restaurants, have experienced significant operational challenges as a result of COVID-19. These negative effects may cause our commercial customers to be unable to pay their loans as they come due or decrease the value of collateral, which we expect would cause significant increases in our credit losses.

Our earnings and cash flows are dependent to a large degree on net interest income. Net interest income is significantly affected by market rates of interest. Significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions that the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to COVID-19, and resulting economic conditions.

The effects of COVID-19 on economic and market conditions have increased demands on our liquidity as we meet our customers’ and clients’ needs. We have suspended repurchases under our stock repurchase program to preserve capital and liquidity in order to support our customers and employees and, although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.

Governmental authorities have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Other negative effects of the COVID-19 pandemic that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that we will continue to be adversely

43

affected until the pandemic subsides and the economy begins to recover. Further, COVID-19 may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019. Even after the pandemic subsides, it is possible that our markets continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.

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

(c) Purchases of Equity Securities by the Company

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased (1)

    

Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number of Shares That May Yet Be Purchased Under the Program

January 1 - January 31, 2020

 

 —

 

$

 —

 

 —

 

 —

February 1 - February 29, 2020

 

20,800

 

 

8.60

 

20,800

 

979,200

March 1 - March 31, 2020

 

95,000

 

 

6.60

 

95,000

 

884,200

Total

 

115,800

 

$

7.60

 

115,800

 

884,200

 

None.(1) Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The repurchase program is authorized for a one year period.

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-Q10‑Q for the period ended September 30, 2017March 31, 2020 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.

 

48

44

 

SIGNATURESSIGNATURES

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:  May 8, 2020

/s/ Bruce E. Thomas

Bruce E. Thomas

Executive Vice President and Chief Financial Officer

(principal financial officer)

Date:  May 8, 2020

 

Date: November 8, 2017


45