Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q10‑Q

 

þ

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

For the quarterly period ended June 30, 2018March 31, 2019

or

o

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)

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, 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 filero

Accelerated filerþ

Non-accelerated filero

(Do not check if a smaller reporting company)

Smaller reporting companyo

Emerging growth companyo

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

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

 

At June 30, 2018,March 31, 2019, there were 22,111,49522,168,979 shares of the Company’s common stock outstanding.

 


 

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q10‑Q

June 30, 2018March 31, 2019

 

2

2


 

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2018MARCH 31, 2019 AND DECEMBER 31, 20172018

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018 *

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

16,809

 

$

18,292

Interest bearing bank deposits

 

 

18,757

 

 

15,927

Federal funds sold

 

 

240

 

 

 —

Total cash and cash equivalents

 

 

35,806

 

 

34,219

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

200,094

 

 

206,726

Securities held to maturity, at cost (fair value of $42,045 and $42,253, respectively)

 

 

41,458

 

 

42,108

Equity securities, restricted, at cost

 

 

8,426

 

 

7,800

Total securities

 

 

249,978

 

 

256,634

 

 

 

 

 

 

 

Loans held for sale

 

 

396

 

 

146

 

 

 

 

 

 

 

Loans

 

 

997,982

 

 

993,705

Purchased credit impaired (PCI) loans

 

 

36,803

 

 

38,285

Total loans

 

 

1,034,785

 

 

1,031,990

Allowance for loan losses (loans of $8,661 and $8,983, respectively; PCI loans of $156 and $156, respectively)

 

 

(8,817)

 

 

(9,139)

Net loans

 

 

1,025,968

 

 

1,022,851

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

31,142

 

 

31,488

Bank premises and equipment held for sale

 

 

1,252

 

 

1,252

Leased assets

 

 

7,177

 

 

 —

Other real estate owned

 

 

1,225

 

 

1,099

Bank owned life insurance

 

 

29,015

 

 

28,834

Other assets

 

 

16,538

 

 

16,627

Total assets

 

$

1,398,497

 

$

1,393,150

 

 

 

 

 

 

 

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest bearing

 

$

165,708

 

$

165,086

Interest bearing

 

 

1,002,415

 

 

999,889

Total deposits

 

 

1,168,123

 

 

1,164,975

 

 

 

 

 

 

 

Federal funds purchased

 

 

 —

 

 

19,440

Federal Home Loan Bank borowings

 

 

69,072

 

 

59,447

Trust preferred capital notes

 

 

4,124

 

 

4,124

Lease liabilities

 

 

7,418

 

 

 —

Other liabilities

 

 

7,452

 

 

7,703

Total liabilities

 

 

1,256,189

 

 

1,255,689

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Common stock (200,000,000 shares authorized, $0.01 par value; 22,168,979 and 22,132,304 shares issued and outstanding, respectively)

 

 

222

 

 

221

Additional paid in capital

 

 

149,115

 

 

148,763

Retained deficit

 

 

(7,406)

 

 

(10,244)

Accumulated other comprehensive income (loss)

 

 

377

 

 

(1,279)

Total shareholders’ equity

 

 

142,308

 

 

137,461

Total liabilities and shareholders’ equity

 

$

1,398,497

 

$

1,393,150


  June 30, 2018  December 31, 2017* 
ASSETS        
Cash and due from banks $11,607  $14,642 
Interest bearing bank deposits  12,020   7,316 
Federal funds sold  180    
Total cash and cash equivalents  23,807   21,958 
         
Securities available for sale, at fair value  199,163   204,834 
Securities held to maturity, at cost (fair value of $43,914 and $46,888, respectively)  43,989   46,146 
Equity securities, restricted, at cost  8,935   9,295 
Total securities  252,087   260,275 
         
         
Loans  967,361   942,018 
Purchased credit impaired (PCI) loans  39,911   44,333 
 Total  loans  1,007,272   986,351 
Allowance for loan losses (loans of $9,089 and $8,969, respectively; PCI loans of $200 and $200, respectively)  (9,289)  (9,169)
  Net loans  997,983   977,182 
         
Bank premises and equipment, net  30,423   30,198 
Bank premises and equipment held for sale  552    
Other real estate owned  3,147   2,791 
Bank owned life insurance  28,466   28,099 
Other assets  17,403   15,687 
Total assets $1,353,868  $1,336,190 
         
LIABILITIES        
Deposits:        
Noninterest bearing $151,956  $153,028 
Interest bearing  971,944   942,736 
Total deposits  1,123,900   1,095,764 
         
Federal funds purchased     4,849 
Federal Home Loan Bank advances  90,691   101,429 
Trust preferred capital notes  4,124   4,124 
Other liabilities  6,509   6,021 
Total liabilities  1,225,224   1,212,187 
         
SHAREHOLDERS’ EQUITY        
Common stock (200,000,000 shares authorized, $0.01 par value; 22,111,495 and 22,072,523 shares issued and outstanding, respectively)  221   221 
Additional paid in capital  148,242   147,671 
Retained deficit  (17,556)  (23,932)
Accumulated other comprehensive (loss) income  (2,263)  43 
Total shareholders’ equity  128,644   124,003 
Total liabilities and shareholders’ equity $1,353,868  $1,336,190 

*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 MONTHS ENDED MARCH 31, 2019 AND 2018

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

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2019

    

March 31, 2018

 

Interest and dividend income

 

 

  

 

 

  

 

Interest and fees on loans

 

$

12,419

 

$

10,876

 

Interest and fees on PCI loans

 

 

1,293

 

 

1,398

 

Interest on deposits in other banks

 

 

96

 

 

40

 

Interest and dividends on securities

 

 

 

 

 

 

 

Taxable

 

 

1,522

 

 

1,186

 

Nontaxable

 

 

476

 

 

579

 

Total interest and dividend income

 

 

15,806

 

 

14,079

 

Interest expense

 

 

  

 

 

  

 

Interest on deposits

 

 

3,234

 

 

2,143

 

Interest on borrowed funds

 

 

447

 

 

469

 

Total interest expense

 

 

3,681

 

 

2,612

 

Net interest income

 

 

12,125

 

 

11,467

 

Provision for loan losses

 

 

 —

 

 

 —

 

Net interest income after provision for loan losses

 

 

12,125

 

 

11,467

 

Noninterest income

 

 

  

 

 

  

 

Service charges and fees

 

 

609

 

 

581

 

(Loss) gain on securities transactions, net

 

 

(14)

 

 

30

 

Income on bank owned life insurance

 

 

181

 

 

183

 

Mortgage loan income

 

 

62

 

 

111

 

Other

 

 

176

 

 

128

 

Total noninterest income

 

 

1,014

 

 

1,033

 

Noninterest expense

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

5,381

 

 

5,849

 

Occupancy expenses

 

 

930

 

 

812

 

Equipment expenses

 

 

381

 

 

314

 

FDIC assessment

 

 

150

 

 

206

 

Data processing fees

 

 

568

 

 

486

 

Other real estate expense, net

 

 

(8)

 

 

50

 

Other operating expenses

 

 

1,438

 

 

1,649

 

Total noninterest expense

 

 

8,840

 

 

9,366

 

Income before income taxes

 

 

4,299

 

 

3,134

 

Income tax expense

 

 

796

 

 

540

 

Net income

 

$

3,503

 

$

2,594

 

Net income per share — basic

 

$

0.16

 

$

0.12

 

Net income per share — diluted

 

$

0.16

 

$

0.12

 

Dividends declared per common share

 

$

0.03

 

$

 

Weighted average number of shares outstanding

 

 

  

 

 

  

 

Basic

 

 

22,141

 

 

22,076

 

Diluted

 

 

22,430

 

 

22,521

 

See accompanying notes to unaudited consolidated financial statements

4


COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

    

March 31, 2019

    

March 31, 2018

 

Net income

 

$

3,503

 

$

2,594

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities:

 

 

 

 

 

 

 

Change in unrealized gain (loss) on investment securities

 

 

2,204

 

 

(2,488)

 

Tax related to unrealized (gain) loss on investment securities

 

 

(485)

 

 

548

 

Reclassification adjustment for loss (gain) on securities sold

 

 

14

 

 

(30)

 

Tax related to realized (loss) gain on securities sold

 

 

(3)

 

 

 7

 

Cash flow hedge:

 

 

 

 

 

 

 

Change in unrealized (loss) gain on cash flow hedge

 

 

(94)

 

 

186

 

Tax related to cash flow hedge

 

 

20

 

 

(40)

 

Total other comprehensive income (loss)

 

 

1,656

 

 

(1,817)

 

Total comprehensive income

 

$

5,159

 

$

777

 

See accompanying notes to unaudited consolidated financial statements

5


COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid in

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2018

 

22,073

 

$

221

 

$

147,671

 

$

(23,932)

 

$

43

 

$

124,003

Issuance of common stock

 

 4

 

 

 —

 

 

39

 

 

 —

 

 

 —

 

 

39

Exercise and issuance of employee stock options

 

 7

 

 

 —

 

 

225

 

 

 —

 

 

 —

 

 

225

Net income

 

 —

 

 

 —

 

 

 —

 

 

2,594

 

 

 —

 

 

2,594

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,817)

 

 

(1,817)

Balance March 31, 2018

 

22,084

 

$

221

 

$

147,935

 

$

(21,338)

 

$

(1,774)

 

$

125,044

Balance January 1, 2019

 

22,132

 

$

221

 

$

148,763

 

$

(10,244)

 

$

(1,279)

 

$

137,461

Issuance of common stock

 

 6

 

 

 —

 

 

54

 

 

 —

 

 

 —

 

 

54

Exercise and issuance of employee stock options

 

31

 

 

 1

 

 

298

 

 

 —

 

 

 —

 

 

299

Net income

 

 —

 

 

 —

 

 

 —

 

 

3,503

 

 

 —

 

 

3,503

Dividends paid on common stock

 

 —

 

 

 —

 

 

 —

 

 

(665)

 

 

 —

 

 

(665)

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,656

 

 

1,656

Balance March 31, 2019

 

22,169

 

$

222

 

$

149,115

 

$

(7,406)

 

$

377

 

$

142,308

See accompanying notes to unaudited consolidated financial statements

6


COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars in thousands)

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

March 31, 2018

 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

3,503

 

$

2,594

 

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

 

 

 

 

 

 

 

Depreciation and intangibles amortization

 

 

545

 

 

459

 

Leased asset amortization

 

 

231

 

 

 —

 

Stock-based compensation expense

 

 

266

 

 

234

 

Tax benefit of exercised stock options

 

 

(31)

 

 

(10)

 

Amortization of purchased loan premium

 

 

60

 

 

54

 

Amortization of security premiums and accretion of discounts, net

 

 

281

 

 

443

 

Net loss (gain) on sale of securities

 

 

14

 

 

(30)

 

Net gain on sale and valuation of other real estate owned

 

 

(50)

 

 

 —

 

Originations of mortgages held for sale

 

 

(1,976)

 

 

(872)

 

Proceeds from sales of mortgages held for sale

 

 

1,726

 

 

872

 

Increase in bank owned life insurance investment

 

 

(181)

 

 

(184)

 

Changes in assets and liabilities:

 

 

 

 

 

  

 

Increase in other assets

 

 

(366)

 

 

(182)

 

(Decrease) increase in accrued expenses and other liabilities

 

 

(58)

 

 

673

 

Net cash provided by operating activities

 

 

3,964

 

 

4,051

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

  

 

 

  

 

Proceeds from sales/calls/maturities/paydowns of available for sale securities

 

 

19,264

 

 

9,363

 

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

 

 

626

 

 

1,584

 

Proceeds from sales of restricted equity securities

 

 

 —

 

 

17

 

Purchase of available for sale securities

 

 

(10,682)

 

 

(9,596)

 

Purchase of restricted equity securities

 

 

(626)

 

 

(78)

 

Proceeds from sale of other real estate owned

 

 

316

 

 

21

 

Net increase in loans

 

 

(4,351)

 

 

(20,708)

 

Principal recoveries of loans previously charged off

 

 

77

 

 

83

 

Purchase of premises and equipment, net

 

 

(199)

 

 

(548)

 

Purchase small business investment company fund investment

 

 

(262)

 

 

(210)

 

Proceeds from sale of loans

 

 

705

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

4,868

 

 

(20,072)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

  

 

 

  

 

Net increase in deposits

 

 

3,148

 

 

556

 

Net (decrease) increase in federal funds purchased

 

 

(19,440)

 

 

15,151

 

Net increase in short-term Federal Home Loan Bank borrowings

 

 

10,000

 

 

5,000

 

Payments on long-term Federal Home Loan Bank borrowings

 

 

(375)

 

 

(5,368)

 

Proceeds from issuance of common stock

 

 

87

 

 

30

 

Cash dividends paid

 

 

(665)

 

 

 —

 

Net cash (used in) provided by financing activities

 

 

(7,245)

 

 

15,369

 

 

 

 

 

 

 

 

 

Net increase (decrease)  in cash and cash equivalents

 

 

1,587

 

 

(652)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

  

 

 

  

 

Beginning of the period

 

 

34,219

 

 

21,958

 

End of the period

 

$

35,806

 

$

21,306

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

  

 

 

  

 

Interest paid

 

$

3,512

 

$

2,638

 

Income taxes paid

 

 

439

 

 

 —

 

Transfers of loans to other real estate owned

 

 

392

 

 

396

 

Transfers of building premises and equipment to held for sale

 

 

 —

 

 

525

 

 

See accompanying notes to unaudited consolidated financial statements

 

3

7


 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

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

  Three months ended  Six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Interest and dividend income                
Interest and fees on loans $11,353  $9,952  $22,229  $19,549 
Interest and fees on PCI loans  1,274   1,452   2,672   2,932 
Interest on federal funds sold  1      1    
Interest on deposits in other banks  69   53   109   78 
Interest and dividends on securities                
Taxable  1,266   1,157   2,452   2,406 
Nontaxable  547   606   1,126   1,203 
Total interest and dividend income  14,510   13,220   28,589   26,168 
Interest expense                
Interest on deposits  2,355   1,944   4,498   3,723 
Interest on borrowed funds  508   302   977   604 
Total interest expense  2,863   2,246   5,475   4,327 
Net interest income  11,647   10,974   23,114   21,841 
Provision for loan losses            
Net interest income after provision for loan losses  11,647   10,974   23,114   21,841 
Noninterest income                
Service charges and fees  611   582   1,192   1,107 
Gain (loss) on securities transactions, net  (16)  37   14   132 
Gain on sale of other loans  53      53    
Income on bank owned life insurance  184   192   367   384 
Mortgage loan income  80   71   191   104 
Other  223   155   351   303 
Total noninterest income  1,135   1,037   2,168   2,030 
Noninterest expense                
Salaries and employee benefits  5,019   4,843   10,868   9,483 
Occupancy expenses  769   740   1,581   1,472 
Equipment expenses  344   260   658   544 
FDIC assessment  198   164   404   365 
Data processing fees  499   477   985   965 
Amortization of intangibles     339      816 
Other real estate expense, net  45   34   95   61 
Other operating expenses  1,313   1,528   2,962   2,970 
Total noninterest expense  8,187   8,385   17,553   16,676 
Income before income taxes  4,595   3,626   7,729   7,195 
Income tax expense  813   692   1,353   1,768 
Net income $3,782  $2,934  $6,376  $5,427 
Net income per share — basic $0.17  $0.13  $0.29  $0.25 
Net income per share — diluted $0.17  $0.13  $0.28  $0.24 
Weighted average number of shares outstanding                
Basic  22,096   21,997   22,086   21,979 
Diluted  22,580   22,424   22,551   22,440 

See accompanying notes to unaudited consolidated financial statements

4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(dollars in thousands)

  Three months ended  Six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Net income $3,782  $2,934  $6,376  $5,427 
                 
Other comprehensive (loss) income:                
Unrealized gain (loss) on investment securities:                
  Change in unrealized (loss) gain on investment securities  (667)  1,165   (3,154)  1,935 
  Tax related to unrealized loss (gain) on investment securities  147   (407)  694   (669)
  Reclassification adjustment for loss (gain) on securities sold  16   (37)  (14)  (132)
  Tax related to realized (loss) gain on securities sold  (4)  13   3   45 
Defined benefit pension plan:                
Tax related to defined benefit pension plan     11      11 
Cash flow hedge:                
  Change in unrealized gain (loss) in cash flow hedge  24   (51)  211   31 
  Tax related to cash flow hedge  (5)  18   (46)  (10)
Total other comprehensive (loss) income  (489)  712   (2,306)  1,211 
Total comprehensive income $3,293  $3,646  $4,070  $6,638 

See accompanying notes to unaudited consolidated financial statements

5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(dollars and shares in thousands)

              Accumulated    
        Additional     Other    
  Common Stock  Paid in  Retained  Comprehensive    
  Shares  Amount  Capital  Deficit  (Loss) Income  Total 
                   
Balance January 1, 2017  21,960  $220  $146,667  $(31,128) $(1,223) $114,536 
Issuance of common stock  77      81         81 
Exercise and issuance of employee stock options        502         502 
Net income           5,427      5,427 
Other comprehensive income              1,211   1,211 
Balance June 30, 2017  22,037  $220  $147,250  $(25,701) $(12) $121,757 
Balance January 1, 2018  22,073  $221  $147,671  $(23,932) $43  $124,003 
Issuance of common stock  7      74         74 
Exercise and issuance of employee stock options  31      497         497 
Net income           6,376      6,376 
Other comprehensive loss              (2,306)  (2,306)
Balance June 30, 2018  22,111  $221  $148,242  $(17,556) $(2,263) $128,644 

See accompanying notes to unaudited consolidated financial statements

6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(dollars in thousands)

  June 30, 2018  June 30, 2017 
Operating activities:        
Net income $6,376  $5,427 
   Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and intangibles amortization  940   1,630 
Stock-based compensation expense  464   373 
Tax benefit of exercised stock options  (37)  (94)
Amortization of purchased loan premium  143   91 
Amortization of security premiums and accretion of discounts, net  850   833 
Net gain on sale of securities  (14)  (132)
Net gain on sale of loans  (53)   
Net loss on sale and valuation of other real estate owned     1 
Originations of mortgages held for sale  (872)   
Proceeds from sales of mortgages held for sale  872    
Increase in bank owned life insurance investment  (368)  (384)
   Changes in assets and liabilities:        
Increase in other assets  (643)  (1,220)
Increase (decrease) in accrued expenses and other liabilities  525   (313)
Net cash provided by operating activities  8,183   6,212 
         
Investing activities:        
Proceeds from sales/calls/maturities/paydowns of available for sale securities  20,549   35,173 
Proceeds from calls/maturities/paydowns of held to maturity securities  2,103   233 
Proceeds from sales/calls/maturities/paydowns of restricted equity securities  465   1,035 
Purchase of available for sale securities  (18,828)  (30,191)
Purchase of held to maturity securities     (643)
Purchase of restricted equity securities  (105)  (793)
Proceeds from sale of other real estate owned  40   2,081 
Net increase in loans  (25,423)  (24,602)
Principal recoveries of loans previously charged off  324   291 
Purchase of premises and equipment, net  (1,717)  (2,228)
Purchase of small business investment company fund investment  (210)  (262)
Proceeds from sale of loans  3,812    
Net cash used in investing activities  (18,990)  (19,906)
         
Financing activities:        
Net increase in deposits  28,136   45,591 
Net decrease in federal funds purchased  (4,849)  (4,714)
Net decrease in short-term Federal Home Loan Bank borrowings  (5,000)  (5,000)
Payments on long-term Federal Home Loan Bank borrowings  (5,738)  (393)
Proceeds from issuance of common stock  107   210 
Payments on long-term debt     (1,670)
Net cash provided by financing activities  12,656   34,024 
         
Net increase in cash and cash equivalents  1,849   20,330 
         
Cash and cash equivalents:        
Beginning of the period  21,958   21,072 
End of the period $23,807  $41,402 
         
Supplemental disclosures of cash flow information:        
Interest paid $5,294  $4,315 
Income taxes paid  1,169   2,470 
Transfers of loans to other real estate owned  396   42 
Transfers of building premises and equipment to held for sale  552    

See accompanying notes to unaudited consolidated financial statements

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 2626 full-service offices and two loan production offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, 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 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, 2017.2018. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of June 30, 2018,March 31, 2019, the statements of income and comprehensive income, for the three and six months ended June 30, 2018, and the statements of changes in shareholders’ equity, and cash flows for the sixthree months ended June 30, 2018.March 31, 2019. Results for the sixthree month period ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

2019.

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

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

Certain reclassifications have been made to prior period balances to conform to the current year presentations. Such reclassifications had no impact on net income or shareholder’sshareholders’ equity.

Recent Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07,Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

8

8


 

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at June 30, 2018March 31, 2019 and December 31, 20172018 were as follows(dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross Unrealized

 

  

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury issue

 

$

11,982

 

$

 —

 

$

(234)

 

$

11,748

U.S. Government agencies

 

 

23,949

 

 

76

 

 

(177)

 

 

23,848

State, county and municipal

 

 

110,171

 

 

2,011

 

 

(250)

 

 

111,932

Mortgage backed securities

 

 

41,342

 

 

397

 

 

(446)

 

 

41,293

Asset backed securities

 

 

5,222

 

 

51

 

 

(3)

 

 

5,270

Corporate bonds

 

 

6,002

 

 

23

 

 

(22)

 

 

6,003

Total Securities Available for Sale

 

$

198,668

 

$

2,558

 

$

(1,132)

 

$

200,094

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government agencies

 

$

10,000

 

$

 —

 

$

(141)

 

$

9,859

State, county and municipal

 

 

31,458

 

 

740

 

 

(12)

 

 

32,186

Total Securities Held to Maturity

 

$

41,458

 

$

740

 

$

(153)

 

$

42,045

 

  June 30, 2018 
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $34,745  $144  $(550) $34,339 
U.S. Gov’t  sponsored agencies  9,077   77   (30)  9,124 
State, county and municipal  120,935   780   (1,636)  120,079 
Corporate and other bonds  8,539   174   (55)  8,658 
Mortgage backed – U.S. Gov’t agencies  5,333   26   (224)  5,135 
Mortgage backed – U.S. Gov’t sponsored agencies  22,479   6   (657)  21,828 
  Total Securities Available for Sale $201,108  $1,207  $(3,152) $199,163 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $  $(287) $9,713 
State, county and municipal  33,585   347   (140)  33,792 
Mortgage backed – U.S. Gov’t agencies  404   5      409 
  Total Securities Held to Maturity $43,989  $352  $(427) $43,914 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury issue

 

$

13,460

 

$

 —

 

$

(336)

 

$

13,124

U.S. Government agencies

 

 

24,689

 

 

71

 

 

(151)

 

 

24,609

State, county and municipal

 

 

112,465

 

 

1,018

 

 

(941)

 

 

112,542

Mortgage backed securities

 

 

46,877

 

 

196

 

 

(656)

 

 

46,417

Asset backed securities

 

 

5,342

 

 

73

 

 

(4)

 

 

5,411

Corporate bonds

 

 

4,685

 

 

 —

 

 

(62)

 

 

4,623

Total Securities Available for Sale

 

$

207,518

 

$

1,358

 

$

(2,150)

 

$

206,726

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government agencies

 

$

10,000

 

$

 —

 

$

(210)

 

$

9,790

State, county and municipal

 

 

32,108

 

 

419

 

 

(64)

 

 

32,463

Total Securities Held to Maturity

 

$

42,108

 

$

419

 

$

(274)

 

$

42,253

 

The amortized cost and fair value of securities at June 30, 2018March 31, 2019 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 Held to Maturity  Available for Sale 

 

Held to Maturity

 

Available for Sale

(dollars in thousands) Amortized Cost  Fair Value  Amortized Cost  Fair Value 

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Due in one year or less $2,661  $2,681  $9,183  $9,199 

 

$

14,104

 

$

13,984

 

$

14,097

 

$

14,136

Due after one year through five years  23,700   23,454   89,195   88,914 

 

 

13,930

 

 

14,220

 

 

81,687

 

 

81,854

Due after five years through ten years  13,399   13,545   96,976   95,387 

 

 

11,661

 

 

12,030

 

 

84,400

 

 

85,374

Due after ten years  4,229   4,234   5,754   5,663 

 

 

1,763

 

 

1,811

 

 

18,484

 

 

18,730

Total securities $43,989  $43,914  $201,108  $199,163 

 

$

41,458

 

$

42,045

 

$

198,668

 

$

200,094

 

9

9


 

Proceeds from sales of securities available for sale were $8.8$16.8 million and $8.7$7.0 million during the  three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and $15.8 million and $21.0 million for the six months ended June 30, 2018 and 2017, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the three and six months ended June 30,March 31, 2019 and 2018 and 2017 were as follows (dollars(dollars in thousands):

 

 

 

 

 

 

 

 Three months ended Six months ended 

 

Three months ended

 

 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 

    

March 31, 2019

    

March 31, 2018

 

Gross realized gains $26  $134  $68  $264 

 

$

53

 

$

42

 

Gross realized losses  (42)  (97)  (54)  (132)

 

 

(67)

 

 

(12)

 

Net securities gains (losses) $(16) $37  $14  $132 

Net securities (loss) gain

 

$

(14)

 

$

30

 

 

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 six months ended June 30, 2018March 31, 2019 and 2017.

2018.

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at June 30, 2018March 31, 2019 and December 31, 20172018 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury issue

 

$

 —

 

$

 —

 

$

11,747

 

$

(234)

 

$

11,747

 

$

(234)

U.S. Government agencies

 

 

7,957

 

 

(53)

 

 

5,222

 

 

(124)

 

 

13,179

 

 

(177)

State, county and municipal

 

 

 —

 

 

 —

 

 

19,525

 

 

(250)

 

 

19,525

 

 

(250)

Mortgage backed securities

 

 

8,439

 

 

(76)

 

 

15,021

 

 

(370)

 

 

23,460

 

 

(446)

Asset backed securities

 

 

515

 

 

(1)

 

 

233

 

 

(2)

 

 

748

 

 

(3)

Corporate bonds

 

 

738

 

 

(12)

 

 

240

 

 

(10)

 

 

978

 

 

(22)

Total

 

$

17,649

 

$

(142)

 

$

51,988

 

$

(990)

 

$

69,637

 

$

(1,132)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government agencies

 

$

 —

 

$

 —

 

$

9,859

 

$

(141)

 

$

9,859

 

$

(141)

State, county and municipal

 

 

 —

 

 

 —

 

 

1,630

 

 

(12)

 

 

1,630

 

 

(12)

Total

 

$

 —

 

$

 —

 

$

11,489

 

$

(153)

 

$

11,489

 

$

(153)

 

  June 30, 2018 
  Less than 12 Months  12 Months or More  Total 
Securities Available for Sale Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
U.S. Treasury issue and other U.S. Gov’t agencies $5,808  $(51) $17,032  $(499) $22,840  $(550)
U.S. Gov’t  sponsored agencies  -   -   2,868   (30)  2,868   (30)
State, county and municipal  48,387   (924)  12,171   (712)  60,558   (1,636)
Corporate and other bonds  1,438   (19)  2,102   (36)  3,540   (55)
Mortgage backed – U.S. Gov’t agencies  951   (23)  2,496   (201)  3,447   (224)
Mortgage backed – U.S. Gov’t sponsored agencies  9,667   (212)  9,416   (445)  19,083   (657)
Total $66,251  $(1,229) $46,085  $(1,923) $112,336  $(3,152)
                         
Securities Held to Maturity                        
U.S. Treasury issue and other U.S. Gov’t agencies $-  $-  $9,713  $(287) $9,713  $(287)
State, county and municipal  6,547   (108)  1,241   (32)  7,788   (140)
Total $6,547  $(108) $10,954  $(319) $17,501  $(427)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Less than 12 Months

 

12 Months or More

 

Total

 Less than 12 Months  12 Months or More  Total 

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury issue and other U.S. Gov’t agencies $5,097  $(36) $19,443  $(346) $24,540  $(382)
U.S. Gov’t sponsored agencies  497   (3)  5,040   (21)  5,537   (24)

U.S. Treasury issue

 

$

1,480

 

$

(1)

 

$

11,644

 

$

(335)

 

$

13,124

 

$

(336)

U.S. Government agencies

 

 

6,959

 

 

(47)

 

 

5,155

 

 

(104)

 

 

12,114

 

 

(151)

State, county and municipal  20,740   (188)  9,569   (408)  30,309   (596)

 

 

7,918

 

 

(81)

 

 

34,540

 

 

(860)

 

 

42,458

 

 

(941)

Corporate and other bonds  -   -   2,772   (36)  2,772   (36)
Mortgage backed – U.S. Gov’t agencies  1,722   (25)  1,876   (121)  3,598   (146)
Mortgage backed – U.S. Gov’t sponsored agencies  6,525   (111)  7,985   (262)  14,510   (373)

Mortgage backed securities

 

 

11,513

 

 

(94)

 

 

15,811

 

 

(562)

 

 

27,324

 

 

(656)

Asset backed securities

 

 

537

 

 

(1)

 

 

294

 

 

(3)

 

 

831

 

 

(4)

Corporate bonds

 

 

3,661

 

 

(47)

 

 

236

 

 

(15)

 

 

3,897

 

 

(62)

Total $34,581  $(363) $46,685  $(1,194) $81,266  $(1,557)

 

$

32,068

 

$

(271)

 

$

67,680

 

$

(1,879)

 

$

99,748

 

$

(2,150)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Held to Maturity                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury issue and other U.S. Gov’t agencies $-  $-  $9,845  $(155) $9,845  $(155)

U.S. Government agencies

 

$

 —

 

$

 —

 

$

9,790

 

$

(210)

 

$

9,790

 

$

(210)

State, county and municipal  1,485   (14)  1,262   (19)  2,747   (33)

 

 

2,452

 

 

(20)

 

 

3,985

 

 

(44)

 

 

6,437

 

 

(64)

Total $1,485  $(14) $11,107  $(174) $12,592  $(188)

 

$

2,452

 

$

(20)

 

$

13,775

 

$

(254)

 

$

16,227

 

$

(274)

 

10

10


 

The unrealized losses (impairments) in the investment portfolio at June 30, 2018March 31, 2019 and December 31, 20172018 are generally a result of market fluctuations of interest rates that occur daily. Interest rates increased consistently across the United States Treasury security yield curve during 2018, thereby increasing unrealized losses on securities.  Likewise, these interest rates consistently decreased during the first quarter of 2019, thereby decreasing unrealized losses on the Company’s securities. The unrealized losses are from 19290 securities at June 30, 2018.March 31, 2019. Of those, 18585 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. FourThree investment grade asset-backed securities comprised of student loan pools included in corporate obligations and threetwo corporate bonds make up the remaining securities with unrealized losses at June 30, 2018.March 31, 2019. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

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

Securities with amortized costs of $57.9 $54.0million and $71.7$56.0 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $7.0 million at both June 30, 2018each of March 31, 2019 and December 31, 20172018 were pledged to secure lines of credit at the Federal Reserve discount window. At each of June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

 

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at June 30, 2018March 31, 2019 and December 31, 20172018 were comprised of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 June 30, 2018  December 31, 2017 

 

March 31, 2019

 

December 31, 2018

 

 Amount  % of Loans  Amount  % of Loans 

    

Amount

    

% of Loans

    

Amount

    

% of Loans

 

Mortgage loans on real estate:                

 

 

 

 

 

 

 

 

 

 

 

Residential 1-4 family $217,610   22.50% $227,542   24.16%

Residential 1‑4 family

 

$

215,348

 

21.58

%  

$

216,268

 

21.77

%

Commercial  376,134   38.88   366,331   38.89 

 

 

379,112

 

37.99

 

 

379,904

 

38.23

 

Construction and land development  119,110   12.31   107,814   11.44 

 

 

123,475

 

12.37

 

 

120,413

 

12.12

 

Second mortgages  7,387   0.76   8,410   0.89 

 

 

6,966

 

0.70

 

 

6,778

 

0.68

 

Multifamily  54,329   5.62   59,024   6.27 

 

 

57,931

 

5.81

 

 

59,557

 

5.99

 

Agriculture  7,467   0.77   7,483   0.79 

 

 

10,780

 

1.08

 

 

8,370

 

0.84

 

Total real estate loans  782,037   80.84   776,604   82.44 

 

 

793,612

 

79.53

 

 

791,290

 

79.63

 

Commercial loans  170,065   17.58   159,024   16.88 

 

 

190,832

 

19.12

 

 

188,722

 

18.99

 

Consumer installment loans  13,717   1.42   5,169   0.55 

 

 

11,923

 

1.19

 

 

12,048

 

1.21

 

All other loans  1,542   0.16   1,221   0.13 

 

 

1,615

 

0.16

 

 

1,645

 

0.17

 

Total loans $967,361   100.00% $942,018   100.00%

 

$

997,982

 

100.00

%  

$

993,705

 

100.00

%

 

The Company held $17.0 million and $18.0$17.4 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $990,000 and $824,000$1.2 million at June 30, 2018each of March 31, 2019 and December 31, 2017,2018, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method.

11


 

At June 30, 2018March 31, 2019 and December 31, 2017,2018, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASBFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310,Receivables,(ii) a general valuation component calculated in accordance with FASB ASC 450,Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

11

The following table summarizes information related to impaired loans as of June 30, 2018March 31, 2019 (dollars in thousands):

           Three months ended  Six months ended 
  June 30, 2018  June 30, 2018  June 30, 2018 
With no related allowance recorded: Recorded Investment(1)  Unpaid Principal Balance(2)  Related Allowance  Average Investment  Interest Recognized  Average Investment  Interest Recognized 
Mortgage loans on real estate:                            
  Residential 1-4 family $1,853  $2,227  $  $1,863  $10  $1,876  $20 
  Commercial  3,578   4,225      3,702   38   3,755   75 
  Construction and land development  388   388      403      268    
  Multifamily  2,559   2,559      1,279   31   853   61 
Total real estate loans  8,378   9,399      7,247   79   6,752   156 
Commercial loans  272   278      625      786    
Subtotal impaired loans with no valuation allowance  8,650   9,677      7,872   79   7,538   156 
With an allowance recorded:                            
Mortgage loans on real estate:                            
  Residential 1-4 family  2,193   2,605   291   2,223   19   2,221   39 
  Commercial  1,546   1,998   458   1,032   2   866   4 
  Construction and land development  4,796   6,061   610   4,966      4,737    
  Agriculture           34      45    
Total real estate loans  8,535   10,664   1,359   8,255   21   7,869   43 
Commercial loans  245   246   31   247   1   273   2 
Consumer installment loans           2      3    
Subtotal impaired loans with a valuation allowance  8,780   10,910��  1,390   8,504   22   8,145   45 
Total:                            
Mortgage loans on real estate:                            
  Residential 1-4 family  4,046   4,832   291   4,086   29   4,097   59 
  Commercial  5,124   6,223   458   4,734   40   4,621   79 
  Construction and land development  5,184   6,449   610   5,369      5,005    
  Multifamily  2,559   2,559      1,279   31   853   61 
  Agriculture           34      45    
 Total real estate loans  16,913   20,063   1,359   15,502   100   14,621   199 
Commercial loans  517   524   31   872   1   1,059   2 
Consumer installment loans           2      3    
  Total impaired loans $17,430  $20,587  $1,390  $16,376  $101  $15,683  $201 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 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

 

$

1,546

 

$

1,881

 

$

 —

 

$

1,555

 

$

11

 

Commercial

 

 

3,368

 

 

4,055

 

 

 —

 

 

3,435

 

 

35

 

Multifamily

 

 

2,552

 

 

2,552

 

 

 —

 

 

2,555

 

 

 —

 

Total real estate loans

 

 

7,466

 

 

8,488

 

 

 —

 

 

7,545

 

 

46

 

Subtotal impaired loans with no valuation allowance

 

 

7,466

 

 

8,488

 

 

 —

 

 

7,545

 

 

46

 

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential 1‑4 family

 

 

2,004

 

 

2,421

 

 

378

 

 

2,067

 

 

20

 

Commercial

 

 

736

 

 

1,231

 

 

87

 

 

1,143

 

 

 4

 

Construction and land development

 

 

4,101

 

 

5,372

 

 

685

 

 

4,336

 

 

 —

 

Total real estate loans

 

 

6,841

 

 

9,024

 

 

1,150

 

 

7,546

 

 

24

 

Commercial loans

 

 

2,331

 

 

2,574

 

 

1,060

 

 

2,157

 

 

 9

 

Consumer installment loans

 

 

 6

 

 

 6

 

 

 1

 

 

 3

 

 

 —

 

Subtotal impaired loans with a valuation allowance

 

 

9,178

 

 

11,604

 

 

2,211

 

 

9,706

 

 

33

 

Total:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential 1‑4 family

 

 

3,550

 

 

4,302

 

 

378

 

 

3,622

 

 

31

 

Commercial

 

 

4,104

 

 

5,286

 

 

87

 

 

4,578

 

 

39

 

Construction and land development

 

 

4,101

 

 

5,372

 

 

685

 

 

4,336

 

 

 —

 

Multifamily

 

 

2,552

 

 

2,552

 

 

 —

 

 

2,555

 

 

 —

 

Total real estate loans

 

 

14,307

 

 

17,512

 

 

1,150

 

 

15,091

 

 

70

 

Commercial loans

 

 

2,331

 

 

2,574

 

 

1,060

 

 

2,157

 

 

 9

 

Consumer installment loans

 

 

 6

 

 

 6

 

 

 1

 

 

 3

 

 

 —

 

Total impaired loans

 

$

16,644

 

$

20,092

 

$

2,211

 

$

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 investment.

(2)

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

12

12


 

The following table summarizes information related to impaired loans as of December 31, 20172018 and the three and six months ended June 30, 2017March 31, 2018 (dollars in thousands):

           Three months ended  Six months ended 
  December 31, 2017  June 30, 2017  June 30, 2017 
With no related allowance recorded: Recorded Investment(1)  Unpaid Principal Balance(2)  Related Allowance  Average Investment  Interest Recognized  Average Investment  Interest Recognized 
Mortgage loans on real estate:                            
  Residential 1-4 family $1,901  $2,246  $  $2,065  $7  $1,945  $15 
  Commercial  3,862   4,477      3,927   38   4,808   76 
  Construction and land development                     
  Agriculture           129      86    
Total real estate loans  5,763   6,723      6,121   45   6,839   91 
Commercial loans  1,108   1,108            400    
Consumer installment loans                     
Subtotal impaired loans with no valuation allowance  6,871   7,831      6,121   45   7,239   91 
With an allowance recorded:                            
Mortgage loans on real estate:                            
  Residential 1-4 family  2,216   2,640   290   2,352   20   2,441   39 
  Commercial  533   958   65   1,596   2   1,270   4 
  Construction and land development  4,277   5,537   556   4,300      4,699    
  Agriculture  68   71   8             
Total real estate loans  7,094   9,206   919   8,248   22   8,410   43 
Commercial loans  325   446   39   892   1   612   2 
Consumer installment loans  7   7   1   26      111    
Subtotal impaired loans with a valuation allowance  7,426   9,659   959   9,166   23   9,133   45 
Total:                            
Mortgage loans on real estate:                            
  Residential 1-4 family  4,117   4,886   290   4,417   27   4,386   54 
  Commercial  4,395   5,435   65   5,523   40   6,078   80 
  Construction and land development  4,277   5,537   556   4,300      4,699    
  Agriculture  68   71   8   129      86    
 Total real estate loans  12,857   15,929   919   14,369   67   15,249   134 
Commercial loans  1,433   1,554   39   892   1   1,012   2 
Consumer installment loans  7   7   1   26      111    
  Total impaired loans $14,297  $17,490  $959  $15,287  $68  $16,372  $136 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31, 2018

 

March 31, 2018

 

    

 

 

    

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

 

$

1,563

 

$

1,890

 

$

 —

 

$

1,888

 

$

 7

Commercial

 

 

3,502

 

 

4,176

 

 

 —

 

 

3,844

 

 

37

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

208

 

 

 —

Multifamily

 

 

2,559

 

 

2,559

 

 

 —

 

 

 —

 

 

 —

Total real estate loans

 

 

7,624

 

 

 8,625

 

 

 —

 

 

5,940

 

 

44

Commercial loans

 

 

 —

 

 

 —

 

 

 —

 

 

1,043

 

 

 —

Subtotal impaired loans with no valuation allowance

 

 

7,624

 

 

8,625

 

 

 —

 

 

6,983

 

 

44

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

2,131

 

 

2,538

 

 

349

 

 

2,234

 

 

19

Commercial

 

 

1,550

 

 

2,034

 

 

482

 

 

525

 

 

 2

Construction and land development

 

 

4,571

 

 

5,840

 

 

515

 

 

4,707

 

 

 —

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

68

 

 

 —

Total real estate loans

 

 

8,252

 

 

10,412

 

 

1,346

 

 

7,534

 

 

21

Commercial loans

 

 

1,983

 

 

1,991

 

 

900

 

 

287

 

 

 1

Consumer installment loans

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

 —

Subtotal impaired loans with a valuation allowance

 

 

10,235

 

 

12,403

 

 

2,246

 

 

7,826

 

 

22

Total:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

 

3,694

 

 

4,428

 

 

349

 

 

4,122

 

 

26

Commercial

 

 

5,052

 

 

6,210

 

 

482

 

 

4,369

 

 

39

Construction and land development

 

 

4,571

 

 

5,840

 

 

515

 

 

4,915

 

 

 —

Multifamily

 

 

2,559

 

 

2,559

 

 

 —

 

 

 —

 

 

 —

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

68

 

 

 —

Total real estate loans

 

 

15,876

 

 

19,037

 

 

1,346

 

 

13,474

 

 

65

Commercial loans

 

 

1,983

 

 

1,991

 

 

900

 

 

1,330

 

 

 1

Consumer installment loans

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

 —

Total impaired loans

 

$

17,859

 

$

21,028

 

$

2,246

 

$

14,809

 

$

66


(1)

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

(2)

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

Troubled debt restructures 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, is set forth in the table below (dollars in thousands):

 

 

 

 

 

 

 June 30, 2018  December 31, 2017 

    

March 31, 2019

    

December 31, 2018

Nonaccruals $9,343  $9,026 

 

$

10,990

 

$

9,500

Trouble debt restructure and still accruing  8,087   5,271 

 

 

5,654

 

 

8,359

Total impaired $17,430  $14,297 

 

$

16,644

 

$

17,859

 

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 six months ended June 30, 2018March 31, 2019 and 2017.2018. For the three months ended June 30,March 31, 2019 and 2018, and 2017, estimated interest income of $183,000$223,000 and $201,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 30, 2018 and 2017, estimated interest income of $322,000 and $345,000,$160,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

13

13


 

There were no loans greater than 90 days past due and still accruing interest at June 30, 2018each of March 31, 2019 and December 31, 2017.2018. The following tables present an age analysis of past due status of loans by category as of June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

30‑89 Days

    

 

 

    

Total Past

    

 

 

    

Total Loans

 

 

Past Due

 

Nonaccrual

 

Due

 

Current

 

Receivable

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

$

1,371

 

$

1,133

 

$

2,504

 

$

212,844

 

$

215,348

Commercial

 

 

876

 

 

1,299

 

 

2,175

 

 

376,937

 

 

379,112

Construction and land development

 

 

 —

 

 

4,101

 

 

4,101

 

 

119,374

 

 

123,475

Second mortgages

 

 

10

 

 

 —

 

 

10

 

 

6,956

 

 

6,966

Multifamily

 

 

 —

 

 

2,552

 

 

2,552

 

 

55,379

 

 

57,931

Agriculture

 

 

 —

 

 

 —

 

 

 —

 

 

10,780

 

 

10,780

Total real estate loans

 

 

2,257

 

 

 9,085

 

 

11,342

 

 

782,270

 

 

793,612

Commercial loans

 

 

16

 

 

1,899

 

 

1,915

 

 

188,917

 

 

190,832

Consumer installment loans

 

 

32

 

 

 6

 

 

38

 

 

11,885

 

 

11,923

All other loans

 

 

 —

 

 

 —

 

 

 —

 

 

1,615

 

 

1,615

Total loans

 

$

2,305

 

$

10,990

 

$

13,295

 

$

984,687

 

$

997,982

 

  June 30, 2018 
  30-89 Days Past Due  Nonaccrual  Total Past Due  Current  Total Loans Receivable 
Mortgage loans on real estate:                    
Residential 1-4 family $1,104  $1,578  $2,682  $214,928  $217,610 
Commercial  87   2,274   2,361   373,773   376,134 
Construction and land  development  65   5,184   5,249   113,861   119,110 
Second mortgages           7,387   7,387 
Multifamily  2,559      2,559   51,770   54,329 
Agriculture           7,467   7,467 
  Total real estate loans  3,815   9,036   12,851   769,186   782,037 
Commercial loans     307   307   169,758   170,065 
Consumer installment loans  21      21   13,696   13,717 
All other loans           1,542   1,542 
Total  loans $3,836  $9,343  $13,179  $954,182  $967,361 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 December 31, 2017 

    

30‑89 Days

    

 

 

 

Total Past

    

 

 

    

Total Loans

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

 

Past Due

 

Nonaccrual

 

Due

 

Current

 

Receivable

Mortgage loans on real estate:                    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1-4 family $1,056  $1,962  $3,018  $224,524  $227,542 

Residential 1‑4 family

 

$

495

 

$

1,257

 

$

1,752

 

$

214,516

 

$

216,268

Commercial  104   1,498   1,602   364,729   366,331 

 

 

551

 

 

2,123

 

 

2,674

 

 

377,230

 

 

379,904

Construction and land development     4,277   4,277   103,537   107,814 

 

 

59

 

 

4,571

 

 

4,630

 

 

115,783

 

 

120,413

Second mortgages           8,410   8,410 

 

 

 —

 

 

 —

 

 

 —

 

 

6,778

 

 

6,778

Multifamily           59,024   59,024 

 

 

2,559

 

 

 —

 

 

2,559

 

 

56,998

 

 

59,557

Agriculture  19   68   87   7,396   7,483 

 

 

 —

 

 

 —

 

 

 —

 

 

8,370

 

 

8,370

Total real estate loans  1,179   7,805   8,984   767,620   776,604 

 

 

3,664

 

 

7,951

 

 

11,615

 

 

779,675

 

 

791,290

Commercial loans  48   1,214   1,262   157,762   159,024 

 

 

80

 

 

1,549

 

 

1,629

 

 

187,093

 

 

188,722

Consumer installment loans  12   7   19   5,150   5,169 

 

 

10

 

 

 —

 

 

10

 

 

12,038

 

 

12,048

All other loans           1,221   1,221 

 

 

 —

 

 

 —

 

 

 —

 

 

1,645

 

 

1,645

Total loans $1,239  $9,026  $10,265  $931,753  $942,018 

 

$

3,754

 

$

9,500

 

$

13,254

 

$

980,451

 

$

993,705

 

14

14


 

Activity in the allowance for loan losses on loans by segment for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 is presented in the following tables (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 Three Months Ended June 30, 2018 

 

 

 

 

Provision

 

 

 

 

 

 

 

 

 

 March 31, 2018  

Provision

Allocation

  Charge-offs  Recoveries  June 30, 2018 

    

December 31, 2017

    

Allocation

    

Charge-offs

    

Recoveries

    

March 31, 2018

Mortgage loans on real estate:                    

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Residential 1-4 family $3,115  $431  $(53) $58  $3,551 

Residential 1‑4 family

 

$

3,466

 

$

(366)

 

$

 —

 

$

15

 

$

3,115

Commercial  2,620   (438)     7   2,189 

 

 

2,423

 

 

184

 

 

 —

 

 

13

 

 

2,620

Construction and land development  1,612   (218)     35   1,429 

 

 

1,247

 

 

364

 

 

 —

 

 

 1

 

 

1,612

Second mortgages  34   (3)     1   32 

 

 

24

 

 

 9

 

 

 —

 

 

 1

 

 

34

Multifamily  198   128         326 

 

 

496

 

 

(298)

 

 

 —

 

 

 —

 

 

198

Agriculture  33   (27)        6 

 

 

14

 

 

19

 

 

 —

 

 

 —

 

 

33

Total real estate loans  7,612   (127)  (53)  101   7,533 

 

 

7,670

 

 

(88)

 

 

 —

 

 

30

 

 

7,612

Commercial loans  962   199      1   1,162 

 

 

1,139

 

 

(152)

 

 

(39)

 

 

14

 

 

962

Consumer installment loans  112   (12)  (67)  136   169 

 

 

110

 

 

 8

 

 

(45)

 

 

39

 

 

112

All other loans  10   (10)     3   3 

 

 

 3

 

 

 7

 

 

 —

 

 

 —

 

 

10

Unallocated  272   (50)        222 

 

 

47

 

 

225

 

 

 —

 

 

 —

 

 

272

Total loans $8,968  $  $(120) $241  $9,089 

 

$

8,969

 

$

 —

 

$

(84)

 

$

83

 

$

8,968

 

  Three Months Ended June 30, 2017 
  March 31, 2017  

Provision

Allocation

  Charge-offs  Recoveries  June 30, 2017 
Mortgage loans on real estate:                    
Residential 1-4 family $2,823  $927  $(12) $59  $3,797 
Commercial  1,776   (11)     18   1,783 
Construction and land development  1,547   (226)     62   1,383 
Second mortgages  50   (19)     2   33 
Multifamily  193   (26)        167 
Agriculture  32   (11)        21 
Total real estate loans  6,421   634   (12)  141   7,184 
Commercial loans  1,316   260   (120)  1   1,457 
Consumer installment loans  133   12   (78)  44   111 
All other loans  15   (6)        9 
Unallocated  1,628   (900)        728 
Total loans $9,513  $  $(210) $186  $9,489 

 

  Six Months Ended June 30, 2018 
  December 31, 2017  

Provision

Allocation

  Charge-offs  Recoveries  June 30, 2018 
Mortgage loans on real estate:                    
Residential 1-4 family $3,466  $65  $(53) $73  $3,551 
Commercial  2,423   (254)     20   2,189 
Construction and land development  1,247   146      36   1,429 
Second mortgages  24   6      2   32 
Multifamily  496   (170)        326 
Agriculture  14   (8)        6 
Total real estate loans  7,670   (215)  (53)  131   7,533 
Commercial loans  1,139   47   (39)  15   1,162 
Consumer installment loans  110   (4)  (112)  175   169 
All other loans  3   (3)     3   3 
Unallocated  47   175         222 
Total loans $8,969  $  $(204) $324  $9,089 

 

15

15


 

Table of Contents

  Six Months Ended June 30, 2017 
  December 31, 2016  

Provision

Allocation

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

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 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

 

$

378

 

$

2,961

 

$

3,339

 

$

3,550

 

$

211,798

 

$

215,348

Commercial

 

 

87

 

 

1,421

 

 

1,508

 

 

4,104

 

 

375,008

 

 

379,112

Construction and land development

 

 

685

 

 

525

 

 

1,210

 

 

4,101

 

 

119,374

 

 

123,475

Second mortgages

 

 

 —

 

 

62

 

 

62

 

 

 —

 

 

6,966

 

 

6,966

Multifamily

 

 

 —

 

 

361

 

 

361

 

 

2,552

 

 

55,379

 

 

57,931

Agriculture

 

 

 —

 

 

23

 

 

23

 

 

 —

 

 

10,780

 

 

10,780

Total real estate loans

 

 

1,150

 

 

5,353

 

 

6,503

 

 

14,307

 

 

779,305

 

 

793,612

Commercial loans

 

 

1,060

 

 

898

 

 

1,958

 

 

2,331

 

 

188,501

 

 

190,832

Consumer installment loans

 

 

 1

 

 

187

 

 

188

 

 

 6

 

 

11,917

 

 

11,923

All other loans

 

 

 —

 

 

 6

 

 

 6

 

 

 —

 

 

1,615

 

 

1,615

Unallocated

 

 

 —

 

 

 6

 

 

 6

 

 

 —

 

 

 

 

 —

Total loans

 

$

2,211

 

$

6,450

 

$

8,661

 

$

16,644

 

$

981,338

 

$

997,982

 

  June 30, 2018 
  Allowance for Loan Losses  Recorded Investment in Loans 
  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

  Total  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

  Total 
Mortgage loans on real estate:                        
Residential 1-4 family $291  $3,260  $3,551  $4,046  $213,564  $217,610 
Commercial  458   1,731   2,189   5,124   371,010   376,134 
Construction and land development  610   819   1,429   5,184   113,926   119,110 
Second mortgages     32   32      7,387   7,387 
Multifamily     326   326   2,559   51,770   54,329 
Agriculture     6   6      7,467   7,467 
Total real estate loans  1,359   6,174   7,533   16,913   765,124   782,037 
Commercial loans  31   1,131   1,162   517   169,548   170,065 
Consumer installment loans     169   169      13,717   13,717 
All other loans     3   3      1,542   1,542 
Unallocated     222   222          
Total loans $1,390  $7,699  $9,089  $17,430  $949,931  $967,361 

  December 31, 2017 
  Allowance for Loan Losses  Recorded Investment in Loans 
  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

  Total  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

  Total 
Mortgage loans on real estate:                        
  Residential 1-4 family $290  $3,176  $3,466  $4,117  $223,425  $227,542 
  Commercial  65   2,358   2,423   4,396   361,935   366,331 
  Construction and land development  556   691   1,247   4,276   103,538   107,814 
  Second mortgages     24   24      8,410   8,410 
  Multifamily     496   496      59,024   59,024 
  Agriculture  8   6   14   68   7,415   7,483 
     Total real estate loans  919   6,751   7,670   12,857   763,747   776,604 
Commercial loans  39   1,100   1,139   1,433   157,591   159,024 
Consumer installment loans  1   109   110   7   5,162   5,169 
All other loans     3   3      1,221   1,221 
Unallocated     47   47          
     Total loans $959  $8,010  $8,969  $14,297  $927,721  $942,018 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Allowance for Loan Losses

 

Recorded Investment in Loans

 

    

Individually

    

Collectively

    

 

 

    

Individually

    

Collectively

    

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

 

Impairment

 

Impairment

 

Total

 

Impairment

 

Impairment

 

Total

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

$

349

 

$

1,932

 

$

2,281

 

$

3,694

 

$

212,574

 

$

216,268

Commercial

 

 

482

 

 

1,328

 

 

1,810

 

 

5,052

 

 

374,852

 

 

379,904

Construction and land development

 

 

515

 

 

646

 

 

1,161

 

 

4,571

 

 

115,842

 

 

120,413

Second mortgages

 

 

 —

 

 

20

 

 

20

 

 

 —

 

 

6,778

 

 

6,778

Multifamily

 

 

 —

 

 

371

 

 

371

 

 

2,559

 

 

56,998

 

 

59,557

Agriculture

 

 

 —

 

 

17

 

 

17

 

 

 —

 

 

8,370

 

 

8,370

Total real estate loans

 

 

1,346

 

 

4,314

 

 

5,660

 

 

15,876

 

 

775,414

 

 

791,290

Commercial loans

 

 

900

 

 

994

 

 

1,894

 

 

1,983

 

 

186,739

 

 

188,722

Consumer installment loans

 

 

 —

 

 

152

 

 

152

 

 

 —

 

 

12,048

 

 

12,048

All other loans

 

 

 —

 

 

12

 

 

12

 

 

 —

 

 

1,645

 

 

1,645

Unallocated

 

 

 —

 

 

1,265

 

 

1,265

 

 

 —

 

 

 —

 

 

 —

Total loans

 

$

2,246

 

$

6,737

 

$

8,983

 

$

17,859

 

$

975,846

 

$

993,705

 

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

Pass -  A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $17.0 million and $18.0$17.4 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

Special Mention -  A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard -  A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well 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.

16


 

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

The following tables present the composition of loans by credit quality indicator at June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Pass

    

Special 
Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential 1‑4 family

 

$

210,128

 

$

4,087

 

$

1,133

 

$

 —

 

$

215,348

Commercial

 

 

371,044

 

 

5,291

 

 

2,777

 

 

 —

 

 

379,112

Construction and land development

 

 

119,168

 

 

206

 

 

4,101

 

 

 —

 

 

123,475

Second mortgages

 

 

6,646

 

 

320

 

 

 —

 

 

 —

 

 

6,966

Multifamily

 

 

55,184

 

 

195

 

 

2,552

 

 

 —

 

 

57,931

Agriculture

 

 

10,723

 

 

57

 

 

 —

 

 

 —

 

 

10,780

Total real estate loans

 

 

772,893

 

 

10,156

 

 

10,563

 

 

 —

 

 

793,612

Commercial loans

 

 

185,418

 

 

2,186

 

 

3,228

 

 

 —

 

 

190,832

Consumer installment loans

 

 

11,914

 

 

 3

 

 

 6

 

 

 —

 

 

11,923

All other loans

 

 

1,615

 

 

 —

 

 

 —

 

 

 —

 

 

1,615

Total loans

 

$

971,840

 

$

12,345

 

$

13,797

 

$

 —

 

$

997,982

 

  June 30, 2018 
  Pass  Special Mention  Substandard  Doubtful  Total 
Mortgage loans on real estate:                    
Residential 1-4 family $212,594  $3,349  $1,667  $  $217,610 
Commercial  361,232   9,471   5,431      376,134 
Construction and land development  113,722   204   5,184      119,110 
Second mortgages  7,181   206         7,387 
Multifamily  51,160   610   2,559      54,329 
Agriculture  7,081   386         7,467 
  Total real estate loans  752,970   14,226   14,841      782,037 
Commercial loans  166,560   3,165   340      170,065 
Consumer installment loans  13,708   9         13,717 
All other loans  1,542            1,542 
Total loans $934,780  $17,400  $15,181  $  $967,361 

  December 31, 2017 
  Pass  Special Mention  Substandard  Doubtful  Total 
Mortgage loans on real estate:                    
Residential 1-4 family $222,026  $3,442  $2,074  $  $227,542 
Commercial  355,188   8,145   2,998      366,331 
Construction and land development  103,356   182   4,276      107,814 
Second mortgages  8,187   223         8,410 
Multifamily  56,452      2,572      59,024 
Agriculture  7,010   385   88      7,483 
  Total real estate loans  752,219   12,377   12,008      776,604 
Commercial loans  156,604   1,171   1,249      159,024 
Consumer installment loans  5,137   25   7      5,169 
All other loans  1,221            1,221 
Total loans $915,181  $13,573  $13,264  $  $942,018 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Pass

    

Special 
Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1‑4 family

 

$

211,832

 

$

3,179

 

$

1,257

 

$

 —

 

$

216,268

Commercial

 

 

372,745

 

 

3,551

 

 

3,608

 

 

 —

 

 

379,904

Construction and land development

 

 

115,650

 

 

192

 

 

4,571

 

 

 —

 

 

120,413

Second mortgages

 

 

6,686

 

 

92

 

 

 —

 

 

 —

 

 

6,778

Multifamily

 

 

56,802

 

 

196

 

 

2,559

 

 

 —

 

 

59,557

Agriculture

 

 

8,312

 

 

58

 

 

 —

 

 

 —

 

 

8,370

Total real estate loans

 

 

772,027

 

 

7,268

 

 

11,995

 

 

 —

 

 

791,290

Commercial loans

 

 

184,004

 

 

1,798

 

 

2,920

 

 

 —

 

 

188,722

Consumer installment loans

 

 

12,042

 

 

 6

 

 

 —

 

 

 —

 

 

12,048

All other loans

 

 

1,645

 

 

 —

 

 

 —

 

 

 —

 

 

1,645

Total loans

 

$

969,718

 

$

9,072

 

$

14,915

 

$

 —

 

$

993,705

 

In accordance with FASB Accounting Standards Update (ASU) 2011-02,2011‑02, 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 2325 and 2123 loans that met the definition of a TDR at June 30,March 31, 2019 and 2018, and 2017, respectively.

During the three and six months ended June 30, 2018, theThe Company modified one multifamilyhad no loan that wasmodifications considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $2.6 million.

DuringTDRs during the three and six months ended June 30, 2017, the Company modified one residential 1-4 family loanMarch 31, 2019 and one agriculture loan that were considered to be TDRs. The Company lowered the interest rate for the residential 1-4 family loan, which had a pre- and post-modification balance of $894,000. The Company extended the terms for the agriculture loan, which had a pre- and post-modification balance of $258,000.

2018.

A loan is considered to be in default if it is 90 days or more past due. During the three months ended March 31, 2019, one loan that had been restructured during the previous 12 months went into default. This multifamily real estate loan had a recorded investment of $2.6 million. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three and six months ended June 30, 2018 and 2017.March 31, 2018.

17


 

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 June 30, 2018,March 31, 2019, the Company had 1-41‑4 family mortgages in the amount of $129.7$111.9 million pledged as collateral to the Federal Home Loan Bank withfor a lendable collateral valuetotal borrowing capacity of $103.6$91.4 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30,310‑30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30.310‑30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-41‑4 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, the outstanding contractual balance of the PCI loans was $65.2$59.8 million and $71.0$62.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 June 30, 2018  December 31, 2017 

    

 

 

    

% 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 $35,900   89.95% $39,805   89.79%

Residential 1‑4 family

 

$

32,860

 

89.29

%  

$

34,240

 

89.43

%

Commercial  490   1.23   547   1.23 

 

 

733

 

1.99

 

 

746

 

1.95

 

Construction and land development  1,499   3.76   1,588   3.58 

 

 

1,301

 

3.54

 

 

1,326

 

3.46

 

Second mortgages  1,774   4.44   2,136   4.82 

 

 

1,668

 

4.53

 

 

1,729

 

4.52

 

Multifamily  248   0.62   257   0.58 

 

 

241

 

0.65

 

 

244

 

0.64

 

Total real estate loans  39,911   100.00   44,333   100.00 

 

 

36,803

 

100.00

 

 

38,285

 

100.00

 

Total PCI loans $39,911   100.00% $44,333   100.00%

 

$

36,803

 

100.00

%  

$

38,285

 

100.00

%

 

There was no activity in the allowance for loan losses on PCI loans for the three and six months ended June 30, 2018March 31, 2019 and 2017.

18

2018.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

    

Allowance

    

Recorded

    

 

 

    

Recorded

 June 30, 2018  December 31, 2017 

 

for loan

 

investment in

 

Allowance for

 

investment in

 Allowance for loan losses  Recorded investment in loans  Allowance for loan losses  Recorded investment in loans 

 

losses

 

loans

 

loan losses

 

loans

Mortgage loans on real estate:                

 

 

  

 

 

  

 

 

  

 

 

  

Residential 1-4 family $200  $35,900  $200  $39,805 

Residential 1‑4 family

 

$

156

 

$

32,860

 

$

156

 

$

34,240

Commercial     490 ��    547 

 

 

 —

 

 

733

 

 

 —

 

 

746

Construction and land development     1,499      1,588 

 

 

 —

 

 

1,301

 

 

 —

 

 

1,326

Second mortgages     1,774      2,136 

 

 

 —

 

 

1,668

 

 

 —

 

 

1,729

Multifamily     248      257 

 

 

 —

 

 

241

 

 

 —

 

 

244

Total real estate loans  200   39,911   200   44,333 

 

 

156

 

 

36,803

 

 

156

 

 

38,285

Total PCI loans $200  $39,911  $200  $44,333 

 

$

156

 

$

36,803

 

$

156

 

$

38,285

 

18


The change in the accretable yield balance for the six three months ended June 30, 2018March 31, 2019 and the year ended December 31, 2017,2018, is as follows (dollars in thousands):

Balance, January 1, 2017 $48,355 

 

 

 

    

 

    

Balance, January 1, 2018

 

$

44,126

Accretion

 

 

(5,219)

Reclassification to nonaccretable difference

 

 

(800)

Balance, December 31, 2018

 

$

38,107

Accretion  (5,729)

 

 

(1,290)

Reclassification from nonaccretable difference  1,500 

 

 

1,027

Balance, December 31, 2017 $44,126 
Accretion  (2,670)
Reclassification to nonaccretable difference  (310)
Balance, June 30, 2018 $41,146 

Balance, March 31, 2019

 

$

37,844

 

The PCI loans were not classified as nonperforming assets as of June 30, 2018,March 31, 2019, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned at June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 June 30, 2018  December 31, 2017 

 

 

 

 

 

 

Residential 1-4 family $882  $486 

    

March 31, 2019

    

December 31, 2018

Residential 1‑4 family

 

$

455

 

$

314

Commercial  15   15 

 

 

 —

 

 

15

Construction and land development  2,250   2,290 

 

 

770

 

 

770

Total other real estate owned $3,147  $2,791 

 

$

1,225

 

$

1,099

 

At June 30, 2018,March 31, 2019, the Company had $408,000$469,000 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, at June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

 

 

 

 

 

 

NOW

 

$

151,647

 

$

165,946

MMDA

 

 

123,024

 

 

126,933

Savings

 

 

94,229

 

 

92,910

Time deposits less than or equal to $250,000

 

 

499,698

 

 

485,155

Time deposits over $250,000

 

 

133,817

 

 

128,945

Total interest bearing deposits

 

$

1,002,415

 

$

999,889

 

  June 30, 2018  December 31, 2017 
       
NOW $162,984  $157,037 
MMDA  145,071   143,363 
Savings  94,498   93,980 
Time deposits less than or equal to $250,000  452,734   437,810 
Time deposits over $250,000  116,657   110,546 
Total interest bearing deposits $971,944  $942,736 

 

19

19


 

Note 7. Accumulated Other Comprehensive Income (Loss) Income

The following tables present activity net of tax in accumulated other comprehensive income (loss) income (AOCI) for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

 

 

Gain (Loss) on

 

Benefit

 

Cash Flow

 

Comprehensive

 

 

Securities

 

Pension Plan

 

Hedge

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

(618)

 

$

(857)

 

$

196

 

$

(1,279)

Other comprehensive income before reclassifications

 

 

1,719

 

 

 —

 

 

(74)

 

 

1,645

Amounts reclassified from AOCI

 

 

11

 

 

 —

 

 

 —

 

 

11

Net current period other comprehensive income

 

 

1,730

 

 

 —

 

 

(74)

 

 

1,656

Ending balance

 

$

1,112

 

$

(857)

 

$

122

 

$

377

 

  Three months ended June 30, 2018 
  Unrealized Gain (Loss) on Securities  Defined Benefit Pension Plan  Gain (Loss) on Cash Flow Hedge  Total Other Comprehensive (Loss) Income 
             
Beginning balance $(1,009) $(1,048) $283  $(1,774)
Other comprehensive (loss) income before reclassifications  (520)  -   19   (501)
Amounts reclassified from AOCI  12   -   -   12 
Net current period other comprehensive (loss) income  (508)  -   19   (489)
Ending balance $(1,517) $(1,048) $302  $(2,263)

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

  Six months ended June 30, 2018 
  Unrealized Gain (Loss) on Securities  Defined Benefit Pension Plan  Gain (Loss) on Cash Flow Hedge  Total Other Comprehensive (Loss) Income 
             
Beginning balance $954  $(1,048) $137  $43 
Other comprehensive (loss) income before reclassifications  (2,460)  -   165   (2,295)
Amounts reclassified from AOCI  (11)  -   -   (11)
Net current period other comprehensive (loss) income  (2,471)  -   165   (2,306)
Ending balance $(1,517) $(1,048) $302  $(2,263)

  Six months ended June 30, 2017 
  Unrealized Gain (Loss) on Securities  Defined Benefit Pension Plan  Gain (Loss) on Cash Flow Hedge  Total Other Comprehensive (Loss) Income 
             
Beginning balance $(410) $(767) $(46) $(1,223)
Other comprehensive income (loss) before reclassifications  1,266   11   21   1,298 
Amounts reclassified from AOCI  (87)  -   -   (87)
Net current period other comprehensive income (loss)  1,179   11   21   1,211 
Ending balance $769  $(756) $(25) $(12)

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

 

 

Gain (Loss) on

 

Benefit

 

Cash Flow

 

Comprehensive

 

 

Securities

 

Pension Plan

 

Hedge

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

954

 

$

(1,048)

 

$

137

 

$

43

Other comprehensive loss before reclassifications

 

 

(1,940)

 

 

 —

 

 

146

 

 

(1,794)

Amounts reclassified from AOCI

 

 

(23)

 

 

 —

 

 

 —

 

 

(23)

Net current period other comprehensive loss

 

 

(1,963)

 

 

 —

 

 

146

 

 

(1,817)

Ending balance

 

$

(1,009)

 

$

(1,048)

 

$

283

 

$

(1,774)

 

The following tables presenttable presents the effects of reclassifications out of AOCI on line items of consolidated income for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 (dollars in thousands):

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 Six months ended   

 

Three months ended

 

 

 June 30, 2018  June 30, 2017   

    

March 31, 2019

    

March 31, 2018

    

  

Securities available for sale:          

 

 

  

 

 

  

 

  

Unrealized gain (loss) on securities available for sale $(14) $(132) Gain (loss) on securities transactions, net

Unrealized losses (gains) on securities available for sale

 

$

14

 

$

(30)

 

Loss (gain) on securities transactions, net

Related tax expense  3   45  Income tax expense

 

 

(3)

 

 

 7

 

Income tax expense

 $(11) $(87) Net of tax

 

$

11

 

$

(23)

 

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 June 30, 2018.March 31, 2019.

21

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, loans held for sale, and the cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury issue

 

$

11,748

 

$

 —

 

$

11,748

 

$

 —

U.S. Government agencies

 

 

23,848

 

 

1,027

 

 

22,821

 

 

 —

State, county and municipal

 

 

111,932

 

 

3,685

 

 

108,247

 

 

 —

Mortgage backed securities

 

 

41,293

 

 

 —

 

 

41,293

 

 

 —

Asset backed securities

 

 

5,270

 

 

 —

 

 

5,270

 

 

 —

Corporate bonds

 

 

6,003

 

 

 —

 

 

6,003

 

 

 —

Total investment securities available for sale

 

 

200,094

 

 

4,712

 

 

195,382

 

 

 —

Cash flow hedge

 

 

159

 

 

 —

 

 

159

 

 

 —

Total assets at fair value

 

$

200,253

 

$

4,712

 

$

195,541

 

$

 —

Total liabilities at fair value

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 June 30, 2018 

 

December 31, 2018

 Total  Level 1  Level 2  Level 3 

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale                

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury issue and other U.S. Gov’t agencies $34,339  $-  $34,339  $- 
U.S. Gov’t sponsored agencies  9,124   -   9,124   - 

U.S. Treasury issue

 

$

13,124

 

$

1,479

 

$

11,645

 

$

 —

U.S. Government agencies

 

 

24,609

 

 

2,178

 

 

22,431

 

 

 —

State, county and municipal  120,079   2,175   117,904   - 

 

 

112,542

 

 

2,644

 

 

109,898

 

 

 —

Corporate and other bonds  8,658   960   7,698   - 
Mortgage backed – U.S. Gov’t agencies  5,135   -   5,135   - 
Mortgage backed – U.S. Gov’t sponsored agencies  21,828   5,267   16,561   - 

Mortgage backed securities

 

 

46,417

 

 

3,496

 

 

42,921

 

 

 —

Asset backed securities

 

 

5,411

 

 

 —

 

 

5,411

 

 

 —

Corporate bonds

 

 

4,623

 

 

 —

 

 

4,623

 

 

 —

Total investment securities available for sale  199,163   8,402   190,761   - 

 

 

206,726

 

 

9,797

 

 

196,929

 

 

 —

Cash flow hedge  387   -   387   - 

 

 

253

 

 

 —

 

 

253

 

 

 —

Total assets at fair value $199,550  $8,402  $191,148  $- 

 

$

206,979

 

$

9,797

 

$

197,182

 

$

 —

Total liabilities at fair value $-  $-  $-  $- 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

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

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). Quoted prices are available within the same month as the settlement date of the related security transaction. As a result, investment securities held at December 31, 2017 priced as Level 1 that were still held at June 30, 2018 were priced as Level 2 securities. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

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 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 typically makes no adjustments to the pricing service data received for its securities available for sale.

 

Cash flow hedge

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

22

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of June 30, 2018March 31, 2019 and December 31, 20172018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

 

$

8,297

 

$

 

$

 

$

8,297

Loans held for sale

 

 

396

 

 

 —

 

 

396

 

 

 —

Bank premises and equipment held for sale

 

 

1,252

 

 

 —

 

 

 —

 

 

1,252

Other real estate owned

 

 

1,225

 

 

 —

 

 

 —

 

 

1,225

Total assets at fair value

 

$

11,170

 

$

 —

 

$

396

 

$

10,774

Total liabilities at fair value

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

  June 30, 2018 
  Total  Level 1  Level 2  Level 3 
Impaired loans $8,800  $  $1,286  $7,514 
Bank premises and equipment held for sale  552         552 
Other real estate owned  3,147      1,163   1,984 
Total assets at fair value $12,499  $  $2,449  $10,050 
Total liabilities at fair value $  $  $  $ 

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

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

 

$

9,343

 

$

 —

 

$

 —

 

$

9,343

Loans held for sale

 

 

146

 

 

 —

 

 

146

 

 

 —

Bank premises and equipment held for sale

 

 

1,252

 

 

 —

 

 

 —

 

 

1,252

Other real estate owned

 

 

1,099

 

 

 —

 

 

 —

 

 

1,099

Total assets at fair value

 

$

11,840

 

$

 —

 

$

146

 

$

11,694

Total liabilities at fair value

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310,Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At June 30, 2018March 31, 2019 and December 31, 2017,2018, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and/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. When the fair value of the collateral is based on an observable market price or a current appraised value without further adjustment for unobservable inputs, the Company records the impaired loan within Level 2.

22


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

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

23

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.

23


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

 

 

    

Estimated Fair

    

 

 

    

 

 

    

 

 

 

 

Carrying Value

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

$

41,458

 

$

42,045

 

$

 

$

42,045

 

$

            —

Loans, net of allowance

 

 

989,321

 

 

979,084

 

 

 —

 

 

 

 

979,084

PCI loans, net of allowance

 

 

36,647

 

 

42,232

 

 

 —

 

 

 

 

42,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

Interest bearing deposits

 

 

1,002,415

 

 

1,000,919

 

 

 —

 

 

1,000,919

 

 

 —

Borrowings

 

 

73,196

 

 

73,073

 

 

 —

 

 

73,073

 

 

 —

 

  June 30, 2018 
  Carrying Value  

Estimated Fair

Value

  Level 1  Level 2  Level 3 
Financial assets:                    
Securities held to maturity $43,989  $43,914  $  $43,914  $ 
Loans, net of allowance  958,272   960,390         960,390 
PCI loans, net of allowance  39,711   43,825         43,825 
                     
Financial liabilities:                    
Interest bearing deposits  971,944   969,945      969,945    
Borrowings  94,815   94,407      94,407    

  December 31, 2017 
  Carrying Value  

Estimated Fair

Value

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

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

 

 

    

Estimated Fair

    

 

 

    

 

 

    

 

 

 

 

Carrying Value

 

Value

 

Level 1

 

Level 2

 

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

$

42,108

 

$

42,253

 

$

 —

 

$

42,253

 

$

 —

Loans, net of allowance

 

 

984,722

 

 

978,778

 

 

 —

 

 

 —

 

 

978,778

PCI loans, net of allowance

 

 

38,129

 

 

42,674

 

 

 —

 

 

 —

 

 

42,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest bearing deposits

 

 

999,889

 

 

997,714

 

 

 —

 

 

997,714

 

 

 —

Borrowings

 

 

63,571

 

 

63,393

 

 

 —

 

 

63,393

 

 

 —

 

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 six months ended June 30,March 31, 2019 and 2018 and 2017 (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 June 30, 2018            

    

 

 

    

Weighted Average

    

 

 

 

Net Income

 

Common Shares

 

Per Common

 

(Numerator)

 

(Denominator)

 

Share Amount

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

Basic EPS $3,782   22,096  $0.17 

 

$

3,503

 

22,141

 

$

0.16

Effect of dilutive stock awards     484    

 

 

 —

 

289

 

 

 —

Diluted EPS $3,782   22,580  $0.17 

 

$

3,503

 

22,430

 

$

0.16

            

 

 

 

 

 

 

 

 

For the three months ended June 30, 2017            

For the three months ended March 31, 2018

 

 

  

 

  

 

 

  

Basic EPS $2,934   21,997  $0.13 

 

$

2,594

 

22,076

 

$

0.12

Effect of dilutive stock awards     427    

 

 

 —

 

445

 

 

 —

Diluted EPS $2,934   22,424  $0.13 

 

$

2,594

 

22,521

 

$

0.12

            
For the six months ended June 30, 2018            
Basic EPS $6,376   22,086  $0.29 
Effect of dilutive stock awards     465   (0.01)
Diluted EPS $6,376   22,551  $0.28 
            
For the six months ended June 30, 2017            
Basic EPS $5,427   21,979  $0.25 
Effect of dilutive stock awards     461   (0.01)
Diluted EPS $5,427   22,440  $0.24 

 

ThereAntidilutive common shares issuable under awards or options of 585,000 and 279,000 were no antidilutive exclusionsexcluded from the computation of diluted earnings per common share for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, respectively.

24


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.

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 six months ended June 30,March 31, 2019 and 2018 and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

    

March 31, 2019

    

March 31, 2018

    

Interest cost

 

$

40

 

$

39

 

Expected return on plan assets

 

 

(53)

 

 

(59)

 

Amortization of prior service cost

 

 

 1

 

 

 1

 

Recognized net loss due to settlement

 

 

13

 

 

 —

 

Recognized net actuarial loss

 

 

12

 

 

15

 

Net periodic benefit income

 

$

13

 

$

(4)

 

 

  Three months ended  Six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Interest cost $39  $39  $79  $78 
Expected return on plan assets  (59)  (70)  (119)  (140)
Amortization of prior service cost  1   1   2   2 
Recognized net loss due to settlement            
Recognized net actuarial  loss  15   12   30   24 
Net periodic benefit income $(4) $(18) $(8) $(36)

25

 

Note 11. Cash Flow Hedge

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

The swap was entered into with a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had $0 and $390,000 of cash pledged as collateral for each of the periods ended June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815,Derivatives and Hedging, the Company has designated the swap as a cash flow hedge, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be effective for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. The fair value of the Company’s cash flow hedge was an unrealized gain of $387,000$159,000 and $177,000$253,000 at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, and was recorded in other assets. The gain was recorded as a component of other comprehensive income (loss) income net of associated tax effects.

25


Note 12. Revenue Recognition

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

Service charges on deposit accounts

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

Interchange and ATM fees

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

26

Brokerage fees and commissions

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

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 2019

 

March 31, 2018

 

Noninterest income

 

 

 

 

 

 

 

In-scope of Topic 606:

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

410

 

$

391

 

Interchange and ATM fees

 

 

199

 

 

190

 

Brokerage fees and commissions

 

 

96

 

 

61

 

Noninterest income (in-scope of Topic 606)

 

 

705

 

 

642

 

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

 

 

309

 

 

391

 

Total noninterest income

 

$

1,014

 

$

1,033

 

 

  Three months ended  Six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Noninterest income                
In-scope of Topic 606:                
Service charges of deposit accounts $390  $384  $781  $754 
Interchange and ATM fees  221   197   411   352 
Brokerage fee and commissions  135   60   196   140 
Noninterest income (in-scope of Topic 606)  746   641   1,388   1,246 
Noninterest income (out-of-scope of Topic 606)  389   396   780   784 
Total noninterest income $1,135  $1,037  $2,168  $2,030 

 

26


Note 13. Branch ClosingLeases

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

The Company's leases have lease terms between five years and twenty 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 Company closed its Prince Street branch located in Tappahannock, Virginiafollowing table presents operating lease liabilities as of the close of business June 29, 2018. From a historical perspective, when the Company opened its Dillard branch, alsoMarch 31, 2019 (dollars in Tappahannock, the Company’s intention was to consolidate the Prince Street branch into the newer Dillard branch, which was built as a larger and modern banking facility. The Company is now following through with its intention.thousands):

 

 

 

 

 

 

 

  

Gross lease liability

 

$

10,190

Less: imputed interest

 

 

(2,772)

Present value of lease liability

 

$

7,418

 

The Prince Street branch building is being marketedweighted average remaining lease term and weighted average discount rate for sale. The book valueoperating leases at March 31, 2019 was 12.1 years and 4.54%, respectively. Maturities of $552,000 reflects the lower of cost or fair market valuegross operating lease liability at June 30,March 31, 2019 are as follows (dollars in thousands):

 

 

 

 

2019

    

$

912

2020

 

 

1,231

2021

 

 

1,191

2022

 

 

600

2023

 

 

630

Thereafter

 

 

5,626

Total of future payments

 

$

10,190

Operating lease costs and sublease rental income for the period ended March 31, 2019 were $330,000 and $27,000, respectively.  Rental expense and sublease rental income under operating lease agreements for the period ended March 31, 2018 was $341,000 and has been classified as held for sale on the consolidated balance sheet.$27,000, respectively. 

 

27


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

The following discussion and analysis of the financial condition at June 30, 2018March 31, 2019 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and six months ended June 30, 2018March 31, 2019 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K10‑K for the year ended December 31, 2017.2018.

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 26 full-service offices and two loan production offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, 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 cash management services.

27

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.

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 and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing expenses, professional fees, transactions involving bank-owned property, and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

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

·

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

·

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

·

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

28


 

·

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;

28

·

consumer profiles and spending and savings habits;

·

levels of fraud in the banking industry;

·

the level of attempted cyber attacks in the banking industry;

·

the securities and credit markets;

·

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

·

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

·

inflation;

·

technology; and

·

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K10‑K for the year ended December 31, 20172018 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,

29


recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

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

Allowance for Loan Losses on Loans

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

29

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.

·

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.

30


 

·

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 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.

30

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are evaluated for 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

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310,Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing

31


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.

Other Real Estate Owned

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

31

Income Taxes

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

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized

32


beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no such interest or penalties during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Under FASB ASC 740,Income Taxes,a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable; therefore, no allowance is required.

The Company and its subsidiaryarethe Bank are subject to U.S. federal income tax as well as Virginia and Maryland state income tax. All years from 20142015 through 20172018 are open to examination by the respective tax authorities.

RESULTS OF OPERATIONS

Overview

Net income of $3.8was $3.5 million for the secondfirst quarter of 2019, compared with net income of $2.6 million in the first quarter of 2018.  Earnings per common share, basic and fully diluted, were $0.16 per share and $0.12 per share for the three months ended March 31, 2019 and 2018, respectively. The increase of $909,000, or 35.0%, in net income for the first quarter of 2019 compared with the first quarter of 2018 was an increaseprimarily the result of $848,000, or 28.9%, over second quarter 2017 net income of $2.9 million. Pre-tax net income increased $969,000, or 26.7%, in the second quarter of 2018. Interest and dividend income increased by $1.3a $1.7 million in the second quarter of 2018 compared with the same period in 2017, driven by interest and fees on loans, which increased $1.4 million. Noninterest income increased by $98,000 year-over-year, and noninterest expenses declined by $198,000. Offsetting these increases was an increase in interest income tax expense, which was $121,000 greater, year-over-year, based on the increase in pre-tax income but lessened by the reduction in the corporate tax rate, from 34% to 21%.

Net income was $6.4 million for the first six months of 2018 compared with $5.4 million for the same period in 2017. This is an increase of $949,000, or 17.5%. Increases were in interest and dividend income, which increased by $2.4 million, or 9.3%, and in noninterest income, which increased by $138,000, or 6.8%. Also positively affecting earnings was a reduction of $415,000$526,000 in income tax expense.noninterest expenses. Offsetting these increases to net income were an increase of $1.2$1.1 million in interest expense, and an increase of $877,000$256,000 in income tax expense and a decrease of $19,000 in noninterest expense. Comparing pre-tax income for the two periods eliminates most of the effect of the Tax Cuts and Jobs Act of 2017. Income before taxes increased by $534,000, or 7.4%, for the first six months of 2018 compared with the same period in 2017.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.”

32

Net interest income increased $673,000,$658,000, or 6.1%5.7%, from the secondfirst quarter of 20172018 to the secondfirst quarter of 2018.2019. Net interest income was $11.6$12.1 million in the secondfirst quarter of 20182019 compared with $11.0$11.5 million for the same period in 2017.2018.  Interest income increased $1.3$1.7 million, or 9.8%12.3%, over this time period.  The increase in interest income was generated by an increase of $69.5$51.1 million, or 5.8%4.1%, in the level of average earning assets.  The yield on earning assets increased from 4.53%4.60% in the secondfirst quarter of 20172018 to 4.64%4.95% in the secondfirst quarter of 2018.2019. The average balance of loans, excluding PCI loans, increased $98.6$55.6 million, or 11.5%5.9%, from $860.4$943.4 million in the secondfirst quarter of 20172018 to $959.0$999.0 million in the secondfirst quarter of 2019.  Interest and dividends on securities was $2.0 million in the first quarter of 2019, an increase of $233,000, or 13.2%, over interest and dividends on securities of $1.8 million in the first quarter of 2018. Interest income on securities was $1.8 million in each of the second quarter of 2018 and second quarter of 2017. OnOn a tax-equivalenttax equivalent basis, the yield on investment securities was 3.11%3.35% in the secondfirst quarter of 2019 and 2.98% in the first quarter of 2018, both of which were based on a 21%21.0% income tax rate, and 3.09% in the second quarter of 2017, based on a 34% tax rate.

 

Interest on PCI loans was $1.3 million in the secondfirst quarter of 20182019 compared with $1.5$1.4 million in the secondfirst quarter of 2017.2018.  The average balance of the PCI portfolio declined $8.1$5.5 million during the year-over-year comparison period.

 

Interest expense increased $617,000,$1.1 million, or 27.5%40.9%, when comparing the secondfirst quarter of 20172018 and the secondfirst quarter of 2018.2019. Interest expense on deposits increased $411,000,$1.1 million, or 21.1%50.9%, as the average balance of interest bearing deposits increased $24.6$55.7 million, or 2.6%5.9%.  Additionally, the average balance of lower cost savings and money market accounts decreased by $17.8 million while the average balance of higher cost time deposits increased by $71.4 million, or 12.9%.  The increaseshift in deposit cost was driven by an increase in NOW and MMDA average balances which increased a combined $60.1 million year-over-year. Likewise, the cost of these balances increased $174,000,interest bearing deposits from 0.26%0.92% in the first quarter of 2018 to 0.44%, over1.31% in the same time frame. Higher cost time deposit average balances declined over the comparison period by $37.9 million; however, expense on this category increased by $236,000, resulting in an increase in cost from 1.16% to 1.41%. first quarter of 2019.

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FHLB and other borrowings increased,decreased, on average, $18.4$32.3 million year-over-year,year over year, and there was an increase in the rate paid, from 1.42%1.74% in the secondfirst quarter of 20172018 to 1.87%2.20% in the secondfirst quarter of 2018. This resulted in an2019. The impact of the lower average balances lowered borrowing costs but was partially mitigated by the increase in therates. The result was a decrease of $22,000 in short-term borrowing costs and interest expense of this wholesale funding source of $182,000, to $482,000 in the second quarter of 2018. The average balance ofon FHLB and other borrowings was $103.2 million in the second quarter of 2018.advances. Overall, the Bank’s cost of interest bearing liabilities increased 1938 basis points, from 0.89% in the second quarter of 2017 to 1.08% in the second quarter of 2018.

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

For the first half of 2018, net interest income increased $1.3 million, or 5.8%, and was $23.1 million. The yield on earning assets was 4.62% compared with 4.57% for the first six months of 2017. Interest and fees on loans of $22.2 million1.00% in the first two quartersquarter of 2018 was an increase of $2.7 million compared with $19.5 million for the same period in 2017. Interest and fees on PCI loans declined $260,000 over this same time frame. Securities income decreased $31,000 for the first six months of 2018 compared with the same period in 2017. On a tax-equivalent basis, income on securities decreased $352,000, primarily the result of less benefit on bank qualified municipal securities from the implementation in December 2017 of the Tax Cuts and Jobs Act. The tax-equivalent yield on the portfolio was 3.04% for the first two quarters of 2018, based on a 21% tax rate, and 3.15% for the same period in 2017, based on a 34% tax rate.

Interest expense of $5.5 million represented an increase of $1.1 millionto 1.38% in the first six monthsquarter of 2018 compared with the same period in 2017. Average interest bearing liabilities increased $52.2 million, or 5.2%, as loan growth was fueled by an average balance increase of $61.3 million, or 25.5%, in the combination of NOW and MMDA accounts. This has allowed more expensive time deposit balances to decrease, on average, by $30.2 million, or 5.1%, resulting in a $32.9 million increase in the average balance of total deposits.2019.

 

The tax equivalent net interest margin declined from 3.83% for the first six months of 2017 to 3.75% for the first six months of 2018. While the yield on earning assets increased by five basis points, over this time frame,from 3.76% in the competition for funding has pushedfirst quarter of 2018 to 3.81% in the costfirst quarter of interest bearing liabilities up, from 0.87% to 1.04%. The net2019.  Conversely, the interest spread decreased from 3.60% to 3.57% over the same time period.  The increase in the margin, despite a decrease in spread, was 3.58% forprecipitated by increases of $12.1 million, or 8.2%, in the first six monthsaverage balance of 2018 versus 3.70% fornoninterest bearing deposits, and $14.9 million, or 11.9%, in the first six monthsaverage balance in shareholders’ equity. Both of 2017.these categories carry no direct interest expense, but the increase was used to fund growth in earning assets.

33

 

The following tables settable sets forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. The tablestable also setsets 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.

 

(dollars in thousands) Three months ended June 30, 2018  Three months ended June 30, 2017 
        Average        Average 
  Average  Interest  Rates  Average  Interest  Rates 
  Balance  Income/  Earned/  Balance  Income/  Earned/ 
  Sheet  Expense  Paid  Sheet  Expense  Paid 
ASSETS:                        
Loans, including fees $958,955  $11,353   4.75% $860,393  $9,952   4.64%
PCI loans, including fees  41,157   1,274   12.24   49,253   1,453   11.80 
Total loans  1,000,112   12,627   5.06   909,646   11,405   5.03 
Interest bearing bank balances  14,819   69   1.85   19,225   52   1.10 
Federal funds sold  87   1   1.82   137   -   1.04 
Securities (taxable)  174,781   1,266   2.90   182,227   1,157   2.54 
Securities (tax exempt)(1)  76,864   693   3.61   85,972   918   4.27 
Total earning assets  1,266,663   14,656   4.64   1,197,207   13,532   4.53 
Allowance for loan losses  (9,271)          (9,697)        
Non-earning assets  92,502           89,222         
Total assets $1,349,894          $1,276,732         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
                         
Demand - interest bearing $301,515   328   0.44  $241,376   154   0.26 
Savings  94,096   61   0.26   91,723   60   0.26 
Time deposits  561,056   1,966   1.41   598,965   1,730   1.16 
Total interest bearing deposits  956,667   2,355   0.99   932,064   1,944   0.84 
Short-term borrowings  4,771   26   2.20   517   2   1.37 
FHLB and other borrowings  103,188   482   1.87   84,761   300   1.42 
Total interest bearing liabilities  1,064,626   2,863   1.08   1,017,342   2,246   0.89 
Noninterest bearing deposits  152,498           133,320         
Other liabilities  5,909           5,654         
Total liabilities  1,223,033           1,156,316         
Shareholders' equity  126,861           120,416         
                         
Total liabilities and shareholders' equity $1,349,894          $1,276,732         
Net interest earnings     $11,793          $11,286     
Interest spread          3.56%          3.64%
Net interest margin          3.73%          3.78%
                         
Tax equivalent adjustment:                        
Securities     $146          $312     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended March 31, 2019

    

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Average

 

 

 

Average

 

Interest

 

Rates

 

Average

 

Interest

 

Rates

 

 

 

Balance

 

Income/

 

Earned/

 

Balance

 

Income/

 

Earned/

 

(Dollars in thousands)

    

Sheet

    

Expense

    

Paid

    

Sheet

    

Expense

    

Paid

 

ASSETS:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Loans, including fees

 

$

999,047

 

$

12,419

 

5.04

%  

$

943,398

 

$

10,876

 

4.68

%  

PCI loans

 

 

37,783

 

 

1,293

 

13.69

 

 

43,331

 

 

1,398

 

12.91

 

Total loans

 

 

1,036,830

 

 

13,712

 

5.36

 

 

986,729

 

 

12,274

 

5.05

 

Interest bearing bank balances

 

 

14,376

 

 

96

 

2.70

 

 

9,060

 

 

40

 

1.80

 

Federal funds sold

 

 

55

 

 

 —

 

2.41

 

 

58

 

 

 —

 

1.55

 

Securities (taxable)

 

 

186,370

 

 

1,522

 

3.27

 

 

176,563

 

 

1,186

 

2.69

 

Securities (tax exempt) (1)

 

 

67,211

 

 

603

 

3.59

 

 

81,342

 

 

733

 

3.60

 

Total earning assets

 

 

1,304,842

 

 

15,933

 

4.95

 

 

1,253,752

 

 

14,233

 

4.60

 

Allowance for loan losses

 

 

(9,084)

 

 

  

 

  

 

 

(9,177)

 

 

  

 

  

 

Non-earning assets

 

 

96,770

 

 

  

 

  

 

 

88,610

 

 

  

 

  

 

Total assets

 

$

1,392,528

 

 

  

 

  

 

$

1,333,185

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand - interest bearing

 

$

157,773

 

 

87

 

0.22

 

$

155,682

 

 

77

 

0.20

 

Savings and money market

 

 

220,945

 

 

293

 

0.54

 

 

238,738

 

 

314

 

0.53

 

Time deposits

 

 

623,417

 

 

2,854

 

1.86

 

 

551,987

 

 

1,752

 

1.29

 

Total interest bearing deposits

 

 

1,002,135

 

 

3,234

 

1.31

 

 

946,407

 

 

2,143

 

0.92

 

Short-term borrowings

 

 

6,837

 

 

50

 

2.94

 

 

2,343

 

 

11

 

1.95

 

FHLB and other borrowings

 

 

73,214

 

 

397

 

2.17

 

 

105,532

 

 

458

 

1.74

 

Total interest bearing liabilities

 

 

1,082,186

 

 

3,681

 

1.38

 

 

1,054,282

 

 

2,612

 

1.00

 

Noninterest bearing deposits

 

 

160,496

 

 

  

 

  

 

 

148,371

 

 

  

 

  

 

Other liabilities

 

 

9,974

 

 

  

 

  

 

 

5,542

 

 

  

 

  

 

Total liabilities

 

 

1,252,656

 

 

  

 

  

 

 

1,208,195

 

 

  

 

  

 

Shareholders’ equity

 

 

139,872

 

 

  

 

  

 

 

124,990

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,392,528

 

 

  

 

  

 

$

1,333,185

 

 

  

 

  

 

Net interest earnings

 

 

  

 

$

12,252

 

  

 

 

  

 

$

11,621

 

  

 

Interest spread

 

 

  

 

 

  

 

3.57

%  

 

  

 

 

  

 

3.60

%  

Net interest margin

 

 

  

 

 

  

 

3.81

%  

 

  

 

 

  

 

3.76

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax equivalent adjustment:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Securities

 

 

  

 

$

127

 

  

 

 

  

 

$

155

 

  

 


(1)

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

34


 

34

(dollars in thousands) Six months ended June 30, 2018  Six months ended June 30, 2017 
        Average        Average 
  Average  Interest  Rates  Average  Interest  Rates 
  Balance  Income/  Earned/  Balance  Income/  Earned/ 
  Sheet  Expense  Paid  Sheet  Expense  Paid 
ASSETS:                        
Loans $951,201  $22,229   4.71% $849,839  $19,549   4.64%
Purchased credit impaired (PCI) loans  42,257   2,672   12.58   50,011   2,932   11.66 
Total loans  993,458   24,901   5.05   899,850   22,481   5.04 
Interest bearing bank balances  11,955   109   1.83   14,207   78   1.11 
Federal funds sold  72   1   1.71   93   -   1.00 
Securities (taxable)  175,667   2,452   2.79   182,734   2,406   2.63 
Securities (tax exempt)(1)  79,091   1,424   3.60   85,353   1,822   4.27 
Total earning assets  1,260,243   28,887   4.62   1,182,237   26,787   4.57 
Allowance for loan losses  (9,224)          (9,709)        
Non-earning assets  90,567           88,919         
Total assets $1,341,586          $1,261,447         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
                         
Demand - interest bearing $301,415   659   0.44  $240,110   295   0.25 
Savings  93,604   121   0.26   91,829   121   0.27 
Time deposits  556,546   3,718   1.35   586,722   3,307   1.14 
Total deposits  951,565   4,498   0.95   918,661   3,723   0.82 
Short-term borrowings  3,563   37   2.12   1,306   7   1.14 
FHLB and other borrowings  104,354   940   1.79   87,354   597   1.38 
Total interest bearing liabilities  1,059,482   5,475   1.04   1,007,321   4,327   0.87 
Noninterest bearing deposits  150,446           130,091         
Other liabilities  5,731           5,534         
Total liabilities  1,215,659           1,142,946         
Shareholders' equity  125,927           118,501         
                         
Total liabilities and shareholders' equity $1,341,586          $1,261,447         
Net interest earnings     $23,412          $22,460     
Interest spread          3.58%          3.70%
Net interest margin          3.75%          3.83%
                         
Tax equivalent adjustment:                        
Securities     $299          $619     

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

Provision for Loan Losses

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

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

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

35

There was no provision for loan losses on the loan portfolio, excluding PCI loans, during either of the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. The absence of a provision inthrough the first and second quartersthree months of 20182019 was the direct result of nominal charge-offs and stable asset quality.over the lookback period. There was no provision for loan losses on the PCI loan portfolio during either of the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Additional discussion of loan quality is presented below.

There wereThe loan portfolio, excluding PCI loans, had net recoveriescharge-offs of $121,000$322,000 in the secondfirst quarter of 2018,2019, compared with net charge-offs of $24,000$1,000 in the secondfirst quarter of 2017.2018. Total charge-offs were $120,000$578,000 for the secondfirst quarter of 20182019 compared with $210,000$84,000 in the secondfirst quarter of 2017.2018. Recoveries of previously charged-off loans were $241,000$256,000 for the secondfirst quarter of 2019 compared with $83,000 in the first quarter of 2018.

Noninterest Income

Noninterest income decreased $19,000, or 1.8%, and was $1.0 million in each of the first quarter of 2019 and the first quarter of 2018. Mortgage loan income decreased $49,000, or 44.1%, from $111,000 in the first quarter of 2018 compared with $186,000to $62,000 in the secondfirst quarter of 2017.

There2019. Gain (loss) on securities transactions, net decreased $44,000 year over year as losses of $14,000 were net recoveries of $120,000 for the six months ended June 30, 2018, compared with net charge-offs of $4,000 for the six months ended June 30, 2017.  Total charge-offs were $204,000 for the six months ended June 30, 2018 compared with $295,000 for the six months ended June 30, 2017.  Recoveries of previously charged-off loans were $324,000 for the six months ended June 30, 2018 compared with $291,000 for the six months ended June 30, 2017.

Noninterest Income

Noninterest income increased $98,000, or 9.5%, and was $1.1 millionrealized in the secondfirst quarter of 2019 versus gains realized of $30,000 in the first quarter of 2018. Offsetting these declines in noninterest income year over year were increases of $48,000 in other noninterest income and $28,000 in service charges and fees.  Other noninterest income of $176,000 in the first quarter of 2019 compared with $128,000 in the first quarter of 2018.  The increase of $48,000 was the result of a $34,000 increase in brokerage fees and commissions combined with an increase of $13,000 in dividend income from investments in partnerships. Service charges and fees were $609,000 in the first quarter of 2019 and increased from $581,000, or 4.8%, as a result of improved commission income, increased $68,000 year over year, and service charges increased $29,000. Gain on sale of loans was $53,000an increase in the second quartervolume of 2018 versus $0 in the second quarter of 2017. Offsetting these increases to noninterest income was a decrease of $53,000 in gain on securities transactions, when a gain of $37,000 was reported in the second quarter of 2017 compared with a loss of $16,000 in the second quarter of 2018.

Noninterest income was $2.2 million for the first six months of 2018, an increase of $138,000, or 6.8%, compared with $2.0 million for the first six months of 2017. Mortgage loan income of $191,000 for the first six months of 2018new accounts. There was an increase of $87,000 from $104,000 for the same period$15.7 million, or 10.4%, year over year, in 2017. Service charges and fees accounts increased $85,000 for the first six months of 2018 compared with the same period in 2017 and were $1.2 million. Gain on sale of loans was $53,000 for the first six months of 2018 versus $0 for the same period in 2017. Other noninterest income, driven by higher commission income, reflected an increase of $48,000 for the first six months of 2018 over the same period in 2017. Partially offsetting these increases was a decline of $118,000 in gains on securities transactions.bearing account balances.

 

Noninterest Expense

Noninterest expenses decreased $198,000,$526,000, or 2.4%5.6%, when comparing the secondfirst quarter of 20182019 to the same period in 2017. Amortization2018. The largest component of intangibles decreased $339,000the change was a reduction of $468,000 in salaries and employee benefits. The decrease year over year was largely attributable to abnormally higher group benefit costs in the first quarter of 2018, which accounted for $446,000 of the $468,000 decrease. Other operating expenses of $1.4 million in the first quarter of 2019 was a decrease of $211,000 from the same period in 2018. Telephone and internet data declined $187,000 year over year as a telephone provider contract was terminated in the first quarter of 2018, with associated breakage fees, but resulted in a much lower quarterly expense thereafter.  Offsetting these decreases was an increase in occupancy expenses, which increased $118,000 year over year, and other operating expenses decreased by $215,000. Withinwere $930,000 in the decreasefirst quarter of $215,0002019 compared with $812,000 in other operating expensesthe first quarter of 2018. The opening of new branches since the first quarter of 2018 and the new lease accounting rules that took

35


effect in the first quarter of 2019 were declinesthe drivers of $113,000the increase. These openings also resulted in telephone and internet line, $64,000 in stationery, printing and supplies, $56,000 in marketing expense and $55,000 in credit expense. Offsetting these decreases to noninterest expenses were increases of $176,000 in salaries and employee benefits, $84,000an increase year over year in equipment expenses, $34,000 in FDIC assessment, $29,000 in occupancy expenses, $22,000 in data processing fees and $11,000 in other real estate expenses mainly attributedwhich increased $67,000, from $314,000 to branch expansion activities that added three new offices during 2017.$381,000.

 

Noninterest expenses were $17.6 million for the first six months of 2018, as compared with $16.7 million for the same period in 2017. This is an increase of $877,000, or 5.3%. Salaries and employee benefits increased $1.4 million for the first six months of 2018 compared with the same period in 2017. Within this increase, $723,000 was related to group hospital and medical insurance increases and $525,000 were related to increases in total salaries. Also impacting noninterest expenses for the first six months of 2018 compared with the same period in 2017 were increases of $114,000 in equipment expenses and $109,000 in occupancy expenses due to the branch expansion activities noted above. These increases were offset by a decline of $816,000 in amortization of intangibles, which became fully amortized in 2017.

Income Taxes

 

Income tax expense was $813,000$796,000 for the three months ended June 30, 2018,March 31, 2019, compared with income tax expense of $692,000 for the second quarter of 2017. For the six months ended June 30, 2018, income tax expense was $1.4 million compared with $1.8 million$540,000 for the first six monthsquarter of 2017.2018.  The effective tax rate for the secondfirst quarter of 20182019 was 17.7% versus 19.1% in18.5% compared with 17.2% for the secondfirst quarter of 2017. For the first six months of 2018, the effective tax rate was 17.5% and for the same period in 2017 it was 24.6%. The decrease in the Company’s effective tax rate resulted principally from the decrease in its applicable federal corporate tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act enacted in December 2017.2018.  

 

36

FINANCIAL CONDITION

 

General

Total assets increased $17.7$5.3 million, or 1.3%0.4%, to $1.354$1.399 billion at June 30, 2018March 31, 2019 when compared withto December 31, 2017.2018. Total loans, excluding PCI loans, were $967.4$998.0 million at June 30, 2018,March 31, 2019, increasing $25.3$4.3 million, or 2.7%0.4%, from year end 2017.2018.   Total PCI loans were $39.9$36.8 million at June 30, 2018March 31, 2019 versus $44.3$38.3 million at year end 2017.December 31, 2018.

 

During the first six monthsquarter of 2018, loans grew by $25.3 million, or 2.7%. Construction2019, construction and land development loans, totaling $123.5 million, grew by $11.3$3.1 million, or 10.5%2.5%. Agriculture loans secured by real estate grew by $2.4 million, or 28.8%, commercialand totaled $10.8 million at March 31, 2019.  Commercial loans grew by $11.0$2.1 million or 6.9%, and commercial mortgages grew by $9.8were $190.8 million or 2.7%.at March 31, 2019. Offsetting these increases were declining balancesthis loan growth was a decline in multifamily loans, which declined $1.6 million as a result of payoff activity and ended the period at $57.9 million, 5.8% of the total portfolio.  Also, residential 1 – 4 family mortgages, whichloans declined by $9.9$920,000 and ended the period at $215.3 million, or 4.4%, and multifamily21.6% of the portfolio. Commercial real estate loans, which decreased $4.7the largest category of loans, at $379.1 million, or 8.0%. In March 2018,38.0% of gross loans outstanding, declined $792,000. Other loan categories declined a nominal $33,000 during the Company purchased an in-market, high quality consumer auto loan pool totaling $9.0 million. The additionfirst quarter of these loans brought an increase in diversification to the portfolio. This purchase resulted in an increase of $8.5 million in consumer installment loans for the six months ended June 30, 2018.2019.

 

The Company’s securities portfolio, excluding restricted equity securities, declined $7.8$7.3 million since year end 20172018 to total $243.2$241.6 million at June 30, 2018.March 31, 2019. Net losses of $16,000$14,000 were realizedrecognized during the secondfirst quarter of 2018 through sales and call activity. For the first six months of 2018, there have been2019 compared with net gains of $14,000 realized through sales and call activity.$30,000 in the first quarter of 2018.  The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile.

 

The Company is required to account for the effect of market changes in the fair value of securities available-for-sale (AFS) under FASB ASC 320,Investments – Debt and Equity Securities. The marketfair value of the AFS portfolio was $199.2$200.1 million at June 30, 2018March 31, 2019 and $204.8$206.7 million at December 31, 2017.2018. At June 30, 2018,March 31, 2019, the Company had a net unrealized lossgain on the AFS portfolio of $1.9$1.4 million compared with a net unrealized gainloss of $1.2 million$792,000 at December 31, 2017.2018. Municipal securities comprised 60.3%55.9% of the total AFS portfolio at June 30, 2018.March 31, 2019. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of $23.8$35.8 million and $22.0$34.2 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.  There were federal funds sold of $180,000$240,000 at June 30, 2018March 31, 2019 and federal funds purchased of $4.8$19.4 million at December 31, 2017.2018.  Interest bearing bank balances were $12.0$18.8 million at June 30, 2018March 31, 2019 compared with $7.3$15.9 million at December 31, 2017.2018.

 

Interest bearing deposits at June 30, 2018March 31, 2019 were $971.9 million,$1.002 billion, an increase of $29.2$2.5 million from December 31, 2017.2018. Time deposits less than or equal to $250,000 have shownincreased by $14.5 million, or 3.0%, during the largest dollar volume growth during 2018 with $14.9first quarter of 2019, followed by increases of $4.9 million in additional balances and now totaling $452.7 million. Timetime deposits over $250,000 grew by $6.1and $1.3 million in savings account balances. The increase in time deposit balances was the result of a shift during the quarter from NOW and were $116.7 million at June 30, 2018.MMDA balances as higher rates attracted consumers to obtain higher returns on their deposit balances.  NOW accounts grewdeclined $14.3 million during the first quarter of 2019 while MMDA balances fell by $5.9 million and were $163.0 million at June 30, 2018.$3.9 million.

 

FHLB advances were $90.7$69.1 million at June 30, 2018,March 31, 2019, compared with $101.4$59.4 million at December 31, 2017.2018.  The increase of $9.7 million in FHLB advances in the first quarter of 2019 was used to reduce federal funds purchased, which were $19.4 million at year end 2018.   

36


Shareholders’ equity was $128.6$142.3 million at June 30, 2018March 31, 2019 and $124.0$137.5 million at December 31, 2017. Shareholder’s2018.  Shareholders’ equity to assets was 9.5%10.2% at June 30, 2018March 31, 2019 and 9.3%9.9% at December 31, 2017.2018.  The Board of Directors recommenced a quarterly dividend to shareholders in the first quarter of 2019, with a $0.03 per common share dividend that totaled $665,000 in the aggregate and was paid on April 1, 2019.

Asset Quality – excluding PCI loans

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

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

37

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled $12.5$12.2 million at June 30, 2018March 31, 2019 and net recoveriescharge-offs were $121,000 and $120,000$322,000 for the three and six months ended June 30, 2018, respectively.March 31, 2019. This compares with nonperforming assets of $11.8$10.6 million and net charge-offsrecoveries of $1.1 million at and$14,000 for the year ended December 31, 2017.

2018.

Nonperforming loans were $9.3$11.0 million at June 30, 2018,March 31, 2019, a $317,000$1.5 million increase from $9.0$9.5 million at December 31, 2017.2018. The $317,000$1.5 million increase in nonperforming loans since December 31, 20172018 was the net result of $2.6$3.4 million in additions to nonperforming loans and $2.3$1.9 million in reductions. The increase related mainly to two residential 1-4 family construction relationships comprised of fourcommercial loans totaling $1.3 million$616,000 and one commercialmultifamily real estate relationship loan of $964,000.$2.6 million. With respect to the reductions in nonperforming loans, $1.1 million$97,000 were payments to existing credits, $101,000$542,000 were charge-offs, $762,000and $1.3 million were paid off, and $343,000 returned to accruing status.

off.

The allowance for loan losses, excluding PCI, equaled 97.28%78.8% of nonaccrual loans at June 30, 2018March 31, 2019 compared with 99.37%94.6% at December 31, 2017.2018. The ratio of nonperforming assets to loans and OREO increased slightly.15 basis points. The ratio was 1.29%1.22% at June 30, 2018March 31, 2019 versus 1.25%1.07% at December 31, 2017.2018.

The allowance for loan losses includes an amount that cannot be related to individual types of loans, and this is referred to as the unallocated component of the allowance. The unallocated component was $6,000 as of March 31, 2019 compared to $1.3 million as of December 31, 2018. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used.  Specifically, at December 31, 2018, in regards to the economic factors, there was significant uncertainty stemming from recent stock market declines and the government shutdown, which ended in early 2019.  The stock market suffered major declines in the fourth quarter due to concerns about a slowdown in worldwide growth and an increased probability of recession.  These factors influenced the Company’s belief that the unallocated component was appropriate at December 31, 2018.  During 2019, delinquencies increased $1.6 million and net charge-offs were $322,000, up from net recoveries of $14,000 at December 31, 2018, both of which contributed to the reduction of the unallocated component at March 31, 2019.

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.

37


See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At June 30, 2018March 31, 2019 and December 31, 2017,2018, total impaired loans, excluding PCI loans, equaled $17.4$16.6 million and $14.3$17.9 million, respectively.

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

  June 30, 2018  December 31, 2017 
Nonaccrual loans $9,343  $9,026 
OREO  3,147   2,791 
      Total nonperforming assets $12,490  $11,817 
         
Accruing troubled debt restructure loans $8,087  $5,271 
         
Balances        
   Specific reserve on impaired loans  1,390   959 
   General reserve related to unimpaired loans  7,699   8,010 
       Total allowance for loan losses $9,089  $8,969 
         
   Average loans during the year, net of unearned income $951,201  $870,258 
         
   Impaired loans  17,430   14,297 
   Non-impaired loans  949,931   927,721 
       Total loans, net of unearned income $967,361  $942,018 
         
Ratios        
   Allowance for loan losses to loans  0.94%  0.95%
   Allowance for loan losses to nonaccrual loans  97.28   99.37 
   General reserve to non-impaired loans  0.81   0.86 
   Nonaccrual loans to loans  0.97   0.96 
   Nonperforming assets to loans and OREO  1.29   1.25 
   Net (recoveries) charge-offs to average loans  (0.01)  0.12 

38

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Nonaccrual loans

 

$

10,990

 

$

9,500

 

Loans past due 90 days and accruing interest

 

 

 —

 

 

 —

 

Total nonperforming loans

 

 

10,990

 

 

9,500

 

OREO

 

 

1,225

 

 

1,099

 

Total nonperforming assets

 

$

12,215

 

$

10,599

 

 

 

 

 

 

 

 

 

Accruing troubled debt restructure loans

 

$

5,654

 

$

8,359

 

 

 

 

 

 

 

 

 

Balances

 

 

  

 

 

  

 

Specific reserve on impaired loans

 

 

2,211

 

 

2,246

 

General reserve related to unimpaired loans

 

 

6,450

 

 

6,737

 

Total allowance for loan losses

 

 

8,661

 

 

8,983

 

 

 

 

 

 

 

 

 

Average loans during the year, net of unearned income

 

 

999,047

 

 

960,978

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

16,644

 

 

17,859

 

Non-impaired loans

 

 

981,338

 

 

975,846

 

Total loans, net of unearned income

 

 

997,982

 

 

993,705

 

 

 

 

 

 

 

 

 

Ratios

 

 

  

 

 

  

 

Allowance for loan losses to loans

 

 

0.87

%  

 

0.90

%

Allowance for loan losses to nonaccrual loans

 

 

78.81

 

 

94.56

 

General reserve to non-impaired loans

 

 

0.66

 

 

0.69

 

Nonaccrual loans to loans

 

 

1.10

 

 

0.96

 

Nonperforming assets to loans and OREO

 

 

1.22

 

 

1.07

 

Net charge-offs (recoveries) to average loans

 

 

0.03

 

 

 —

 

The Company grants troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At June 30, 2018, the Company had 23 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. Six of these loans totaling $3.3 million were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at June 30, 2018 was $9.3 million, of which $1.2 million were classified as nonaccrual.

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

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

 

A further breakout of nonaccrual loans, excluding PCI loans, at June 30, 2018March 31, 2019 and December 31, 20172018 is below (dollars in thousands):

 

 

 

 

 

 

 

 June 30, 2018  December 31, 2017 

    

March 31, 2019

    

December 31, 2018

 

Mortgage loans on real estate:        

 

 

 

 

 

 

 

Residential 1-4 family $1,578  $1,962 

Residential 1‑4 family

 

$

1,133

 

$

1,257

 

Commercial  2,274   1,498 

 

 

1,299

 

 

2,123

 

Construction and land development  5,184   4,277 

 

 

4,101

 

 

4,571

 

Agriculture     68 

Multifamily

 

 

2,552

 

 

 —

 

Total real estate loans  9,036   7,805 

 

 

9,085

 

 

7,951

 

Commercial loans  307   1,214 

 

 

1,899

 

 

1,549

 

Consumer installment loans     7 

 

 

 6

 

 

 —

 

Total loans $9,343  $9,026 

 

$

10,990

 

$

9,500

 

 

At June 30, 2018,March 31, 2019, the Company had ninefour 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 June 30, 2018March 31, 2019 was $5.2$4.1 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.


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The total amount of the allowance for loan losses attributed to all ninefour relationships was $610,000$685,000 at June 30, 2018,March 31, 2019, or 11.8%16.7% 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 orderedfrequently obtains appraisals prepared by external professional appraisers for allclassified loans with balances in excess ofgreater than $250,000 unless there existed anwhen the most recent appraisal that was not olderis greater than 18 months and/orold and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral.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 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.

39

Capital Requirements

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

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 four definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan loss allowance.losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The leverage ratio“leverage ratio” is tier 1 capital divided by total average assets.

The Company’sBank’s ratio of total risk-based capital was 13.3%13.5% at June 30, 2018March 31, 2019 compared with 12.7%13.3% at December 31, 2017.2018. The tier 1 risk-based capital ratio was 12.5%12.7% at June 30, 2018March 31, 2019 and 11.9%12.6% at December 31, 2017.2018. The Company’sBank’s tier 1 leverage ratio was 10.0%10.3% at June 30, 2018March 31, 2019 and 9.7%10.2% at December 31, 2017.2018. All capital ratios exceed regulatory

39


minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 12.1%12.7% at June 30, 2018March 31, 2019 and 11.5%12.6% at December 31, 2017.

2018.

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the 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 June 30, 2018,March 31, 2019, the CompanyBank had a capital conservation buffer of 5.3%, well above the 2018 required buffer of 1.875%5.5%.

Liquidity

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

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at June 30, 2018March 31, 2019 and December 31, 20172018 was as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Cash and due from banks

 

$

16,809

 

$

18,292

 

Interest bearing bank deposits

 

 

18,757

 

 

15,927

 

Federal funds sold

 

 

240

 

 

 —

 

Available for sale securities, at fair value, unpledged

 

 

169,239

 

 

174,842

 

Total liquid assets

 

$

205,045

 

$

209,061

 

 

 

 

 

 

 

 

 

Deposits and other liabilities

 

$

1,256,189

 

$

1,255,689

 

Ratio of liquid assets to deposits and other liabilities

 

 

16.32

%  

 

16.65

%

 

  June 30, 2018  December 31, 2017 
Cash and due from banks $11,607  $14,642 
Interest bearing bank deposits  12,020   7,316 
Federal funds sold  180    
Available for sale securities, at fair value, unpledged  167,189   168,221 
Total liquid assets $190,996  $190,179 
         
Deposits and other liabilities $1,225,224  $1,212,187 
Ratio of liquid assets to deposits and other liabilities  15.59%  15.69%

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. During the second quarter of 2018 the Company obtained an additional line of credit of $20 million. The Company has a total of $55 million in this type of facility in aggregate.the aggregate at March 31, 2019.

40

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of June 30, 2018March 31, 2019 and December 31, 2017,2018, is as follows (dollars in thousands):

 

 

 

 

 

 June 30, 2018  December 31, 2017 

    

March 31, 2019

    

December 31, 2018

Commitments with off-balance sheet risk:        

 

 

  

 

  

Commitments to extend credit $182,340  $163,686 

 

$

218,290

 

$

204,831

Standby letters of credit  5,775   6,532 

 

 

4,828

 

 

5,280

Total commitments with off-balance sheet risks $188,115  $170,218 

 

$

223,118

 

$

210,111

 

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

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

40


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

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

The fair value of the Company’s cash flow hedge was an unrealized gain of $387,000$159,000 and $177,000$253,000 at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, which was recorded in other assets. The Company’s cash flow hedge is deemed to be effective. Therefore, the gain was recorded as a component of other comprehensive income (loss) income recorded in the Company’s Consolidated Statements of Comprehensive Income.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

41

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

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month12‑month period is assumed.

41


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 June 30, 2018March 31, 2019 (dollars in thousands):

 

 

 

 

 June 30, 2018 

 

March 31, 2019

 %  $ 

    

%

    

$

Change in Yield curve        

 

 

 

 

+400 bp  5.7   2,682 

 

4.6

 

2,193

+300 bp  4.3   2,014 

 

3.7

 

1,782

+200 bp  2.7   1,277 

 

2.8

 

1,350

+100 bp  1.0   481 

 

1.5

 

704

most likely      

 

 

-100 bp  (2.7)  (1,282)
-200 bp  (6.0)  (2,822)
-300 bp  (8.1)  (3,802)
-400 bp  (8.2)  (3,823)

‑100 bp

 

(2.2)

 

(1,058)

‑200 bp

 

(4.0)

 

(1,941)

‑300 bp

 

(5.3)

 

(2,536)

‑400 bp

 

(5.3)

 

(2,551)

 

At June 30, 2018,March 31, 2019, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 5.7%4.6%. 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 8.2%5.3%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

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

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

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q,10‑Q, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer (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  rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

42

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

42


Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

As of the date of this report, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K10‑K for the year ended December 31, 2017.2018.

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

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable

Item 5.Other Information

None.

Item 6. Exhibits

Exhibit No.

43

Item 6.Exhibits

    

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 June 30, 2018March 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

*Filed herewith.

 

*Filed herewith.

43


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:  May 9, 2019

Date: August 8, 2018

/s/ Bruce E. Thomas

Bruce E. Thomas

Executive Vice President and Chief Financial Officer

(principal financial officer)

Date:  August 8, 2018May 9, 2019

 

44

 

44