UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM ~~10-Q~~10‑Q


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

	For the quarterly period ended ~~September 30, 2018~~March 31, 2019
or
¨ or

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

	For the transition period fromto

Commission File Number: ~~001-32590~~001‑32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

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

9954 Mayland Drive, Suite 2100
Richmond, Virginia	23233
(Address of principal executive offices)	(Zip Code)
(804) ~~934-9999~~934‑9999 (Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑ No ¨

☐

Indicate by check mark whether the registrant has submitted electronically 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~~submit. such files). Yes þ☑ No ¨

☐

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

Large accelerated filer¨	☐		Accelerated filerþ	☑

Non-accelerated filer¨	☐		Smaller reporting company¨	☑

		Emerging growth company¨	☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b-2~~12b‑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 ~~September 30, 2018,~~March 31, 2019, there were ~~22,120,862~~22,168,979 shares of the Company’s common stock outstanding.

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM ~~10-Q~~10‑Q

~~September 30, 2018~~March 31, 2019

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43 41
Item 4. Controls and Procedures	45 42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	45 43
Item 1A. Risk Factors	46 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46 43
Item 3. Defaults upon Senior Securities	46 43
Item 4. Mine Safety Disclosures	46 43
Item 5. Other Information	46 43
Item 6. Exhibits	46 43
SIGNATURES	47 44

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

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

(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

September 30, 2018 December 31, 2017*
ASSETS
Cash and due from banks $ 12,918 $ 14,642
Interest bearing bank deposits 11,177 7,316
Federal funds sold 240 —
Total cash and cash equivalents 24,335 21,958

Securities available for sale, at fair value 200,603 204,834
Securities held to maturity, at cost (fair value of $43,195 and $46,888, respectively) 43,559 46,146
Equity securities, restricted, at cost 7,886 9,295
Total securities 252,048 260,275

Loans 962,425 942,018
Purchased credit impaired (PCI) loans 39,144 44,333
Total loans 1,001,569 986,351
Allowance for loan losses (loans of $8,993 and $8,969, respectively; PCI loans of $137 and $200, respectively) (9,130 ) (9,169 )
Net loans 992,439 977,182

Bank premises and equipment, net 31,782 30,198
Bank premises and equipment held for sale 1,252 —
Other real estate owned 1,732 2,791
Bank owned life insurance 28,649 28,099
Other assets 18,183 15,687
Total assets $ 1,350,420 $ 1,336,190

LIABILITIES
Deposits:
Noninterest bearing $ 158,854 $ 153,028
Interest bearing 975,034 942,736
Total deposits 1,133,888 1,095,764

Federal funds purchased 10,000 4,849
Federal Home Loan Bank advances 63,820 101,429
Trust preferred capital notes 4,124 4,124
Other liabilities 6,785 6,021
Total liabilities 1,218,617 1,212,187

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,120,862 and 22,072,523 shares issued and outstanding, respectively) 221 221
Additional paid in capital 148,494 147,671
Retained deficit (13,601 ) (23,932 )
Accumulated other comprehensive (loss) income (3,311 ) 43
Total shareholders’ equity 131,803 124,003
Total liabilities and shareholders’ equity $ 1,350,420 $ 1,336,190

*Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE 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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

~~COMMUNITY BANKERS TRUST CORPORATION~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF INCOME~~

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

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

Three months ended Nine months ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Interest and dividend income
Interest and fees on loans $ 11,893 $ 10,127 $ 34,122 $ 29,676
Interest and fees on PCI loans 1,265 1,423 3,937 4,355
Interest on federal funds sold — 1 1 1
Interest on deposits in other banks 94 65 203 143
Interest and dividends on securities
Taxable 1,364 1,171 3,816 3,577
Nontaxable 528 602 1,654 1,805
Total interest and dividend income 15,144 13,389 43,733 39,557
Interest expense
Interest on deposits 2,699 2,053 7,197 5,776
Interest on borrowed funds 465 310 1,442 914
Total interest expense 3,164 2,363 8,639 6,690
Net interest income 11,980 11,026 35,094 32,867
Provision for loan losses — 150 — 150
Net interest income after provision for loan losses 11,980 10,876 35,094 32,717
Noninterest income
Service charges and fees 626 558 1,818 1,665
Gain on securities transactions, net 68 48 82 180
Gain on sale of other loans 65 — 118 —
Income on bank owned life insurance 184 188 551 572
Mortgage loan income 97 59 288 163
Other 171 145 522 448
Total noninterest income 1,211 998 3,379 3,028
Noninterest expense
Salaries and employee benefits 5,029 4,951 15,897 14,434
Occupancy expenses 780 857 2,361 2,329
Equipment expenses 366 305 1,024 849
FDIC assessment 195 185 599 550
Data processing fees 482 501 1,467 1,466
Amortization of intangibles — 62 — 878
Other real estate expense, net 63 37 158 98
Other operating expenses 1,376 1,641 4,338 4,611
Total noninterest expense 8,291 8,539 25,844 25,215
Income before income taxes 4,900 3,335 12,629 10,530
Income tax expense 945 919 2,298 2,687
Net income $ 3,955 $ 2,416 $ 10,331 $ 7,843
Net income per share — basic $ 0.18 $ 0.11 $ 0.47 $ 0.36
Net income per share — diluted $ 0.17 $ 0.11 $ 0.46 $ 0.35
Weighted average number of shares outstanding
Basic 22,115 22,041 22,095 22,000
Diluted 22,627 22,542 22,576 22,491

~~See accompanying notes to unaudited consolidated financial statements~~

COMMUNITY BANKERS TRUST CORPORATION

~~UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

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

~~(dollars in thousands)~~

Three months ended Nine months ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Net income $ 3,955 $ 2,416 $ 10,331 $ 7,843

Other comprehensive (loss) income:
Unrealized gain (loss) on investment securities:
Change in unrealized (loss) gain in investment securities (1,240 ) 66 (4,393 ) 2,001
Tax related to unrealized loss (gain) in investment securities 272 (23 ) 965 (692 )
Reclassification adjustment for gain in securities sold (68 ) (48 ) (82 ) (180 )
Tax related to realized gain in securities sold 15 17 18 62
Defined benefit pension plan:
Tax related to defined benefit pension plan — — — 11
Cash flow hedge:
Change in unrealized (loss) gain in cash flow hedge (35 ) 55 177 86
Tax related to cash flow hedge 8 (20 ) (39 ) (30 )
Total other comprehensive (loss) income (1,048 ) 47 (3,354 ) 1,258
Total comprehensive income $ 2,907 $ 2,463 $ 6,977 $ 9,101

~~See accompanying notes to unaudited consolidated financial statements~~

~~COMMUNITY BANKERS TRUST CORPORATION~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 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 21 — 120 — — 120
Exercise and issuance of employee stock options 67 — 666 — — 666
Net income — — — 7,843 — 7,843
Other comprehensive income — — — — 1,258 1,258
Balance September 30, 2017 22,048 $ 220 $ 147,453 $ (23,285 ) $ 35 $ 124,423
Balance January 1, 2018 22,073 $ 221 $ 147,671 $ (23,932 ) $ 43 $ 124,003
Issuance of common stock 13 — 122 — — 122
Exercise and issuance of employee stock options 35 — 701 — — 701
Net income — — — 10,331 — 10,331
Other comprehensive loss — — — — (3,354 ) (3,354 )
Balance September 30, 2018 22,121 $ 221 $ 148,494 $ (13,601 ) $ (3,311 ) $ 131,803

~~See accompanying notes to unaudited consolidated financial statements~~

~~COMMUNITY BANKERS TRUST CORPORATION~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

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

~~(dollars in thousands)~~

September 30, 2018 September 30, 2017
Operating activities:
Net income $ 10,331 $ 7,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization 1,461 2,136
Stock-based compensation expense 709 559
Tax benefit of exercised stock options (43 ) (105 )
Amortization of purchased loan premium 195 141
Provision for loan losses — 150
Amortization of security premiums and accretion of discounts, net 1,215 1,331
Net gain on sale of securities (82 ) (180 )
Net gain on sale of loans (118 ) —
Net loss (gain) on sale and valuation of other real estate owned 21 (4 )
Originations of mortgages held for sale (872 ) —
Proceeds from sales of mortgages held for sale 872 —
Increase in bank owned life insurance investment (551 ) (572 )
Changes in assets and liabilities:
Increase in other assets (912 ) (1,526 )
Increase in accrued expenses and other liabilities 763 400
Net cash provided by operating activities 12,989 10,173

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities 31,397 47,313
Proceeds from calls/maturities/paydowns of held to maturity securities 2,504 660
Proceeds from sales/calls/maturities/paydowns of restricted equity securities 1,828 1,255
Purchase of available for sale securities (32,691 ) (40,839 )
Purchase of held to maturity securities — (643 )
Purchase of restricted equity securities (419 ) (1,321 )
Proceeds from sale of other real estate owned 1,434 2,118
Net increase in loans (21,782 ) (49,063 )
Principal recoveries of loans previously charged off 418 380
Purchase of premises and equipment, net (4,297 ) (2,370 )
Purchase small business investment company fund investment (420 ) (525 )
Proceeds from sale of loans 5,635 —
Net cash used in investing activities (16,393 ) (43,035 )

Financing activities:
Net increase in deposits 38,124 41,088
Net increase (decrease) in federal funds purchased 5,151 (4,714 )
Net decrease in short-term Federal Home Loan Bank borrowings (26,500 ) —
Payments on long-term Federal Home Loan Bank borrowings (11,109 ) (591 )
Proceeds from issuance of common stock 115 227
Payments on long-term debt — (1,670 )
Net cash provided by financing activities 5,781 34,340

Net increase in cash and cash equivalents 2,377 1,478

Cash and cash equivalents:
Beginning of the period 21,958 21,072
End of the period $ 24,335 $ 22,550

Supplemental disclosures of cash flow information:
Interest paid $ 8,193 $ 6,638
Income taxes paid 2,234 3,320
Transfers of loans to other real estate owned 396 397
Transfers of building premises and equipment to held for sale 1,252 —

~~See accompanying notes to unaudited consolidated financial statements~~

~~COMMUNITY BANKERS TRUST CORPORATION~~

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

~~Organization~~

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2526 full-service offices and two loan production offices in Virginia and Maryland.

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-K~~10‑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 ~~September 30, 2018,~~March 31, 2019, the statements of income and comprehensive income, ~~for the three and nine months ended September 30, 2018, and the statements of~~ changes in shareholders’ equity, and cash flows for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. Results for the ~~nine~~three month period ended ~~September 30, 2018~~March 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 shareholders’ equity.

~~Recent Accounting Pronouncements~~

~~In August 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-13,~~~~Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.~~~~The ASU removes, modifies, and adds to existing fair value measurement disclosure requirements.~~

~~The following public company disclosure requirements are removed:~~

~~Transfers between Level 1 and Level 2 of the fair value hierarchy~~

~~The policy for determining when transfers between any of the three levels have occurred~~

~~The valuation processes used for Level 3 measurements~~

~~The following public company disclosure requirements are modified:~~

~~For certain investments that calculate the net asset value, timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity~~

~~A clarification that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date~~

~~The following public company disclosure requirements are new:~~

~~The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date~~

The range and weighted average of significant unobservable inputs used for Level 3 measurements. For certain unobservable inputs, an option to disclose other quantitative information in place of the weighted average is available to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs.

The ASU is effective for all entities in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. In addition, an entity may early adopt anyTable of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.Contents

~~Also in August 2018, the FASB issued ASU 2018-14,~~~~Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plan.~~This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

~~In June 2018, the FASB issued 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.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 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

September 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 $ 26,600 $ 30 $ (593 ) $ 26,037
U.S. Gov’t sponsored agencies 8,378 82 (36 ) 8,424
State, county and municipal 117,557 456 (2,269 ) 115,744
Corporate and other bonds 9,647 73 (69 ) 9,651
Mortgage backed – U.S. Gov’t agencies 14,420 114 (280 ) 14,254
Mortgage backed – U.S. Gov’t sponsored agencies 27,255 5 (767 ) 26,493
Total Securities Available for Sale $ 203,857 $ 760 $ (4,014 ) $ 200,603

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ 10,000 $ — $ (320 ) $ 9,680
State, county and municipal 33,559 202 (246 ) 33,515
Total Securities Held to Maturity $ 43,559 $ 202 $ (566 ) $ 43,195

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 $ 27,478 $ 64 $ (359 ) $ 27,183
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 18,546 138 (169 ) 18,515
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 ~~September 30, 2018~~March 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
(dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less $ 14,384 $ 14,047 $ 9,568 $ 9,556
Due after one year through five years 12,986 12,908 87,659 86,959
Due after five years through ten years 12,772 12,840 92,284 89,858
Due after ten years 3,417 3,400 14,346 14,230
Total securities $ 43,559 $ 43,195 $ 203,857 $ 200,603


	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	14,104	$	13,984	$	14,097	$	14,136
Due after one year through five years		13,930		14,220		81,687		81,854
Due after five years through ten years		11,661		12,030		84,400		85,374
Due after ten years		1,763		1,811		18,484		18,730
Total securities	$	41,458	$	42,045	$	198,668	$	200,094

Table of Contents

Proceeds from sales of securities available for sale were ~~$8.4~~$16.8 million and ~~$9.1~~$7.0 million during the three months ended
~~September 30,~~ March 31, 2019 and 2018, ~~and 2017, respectively, and $24.2 million and $30.1 million for the nine months ended September 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 nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows ~~(dollars~~(dollars in thousands):


	Three months ended						Nine months ended						Three months ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			March 31, 2019		March 31, 2018
Gross realized gains	$	93		$	114		$	161		$	378		$	53	$	42
Gross realized losses		(25	)		(66	)		(79	)		(198	)		(67)		(12)
Net securities gains	$	68		$	48		$	82		$	180
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 nine~~ months ended ~~September 30, 2018~~March 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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 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)


	December 31, 2018
	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	$	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		7,918		(81)		34,540		(860)		42,458		(941)
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	$	32,068	$	(271)	$	67,680	$	(1,879)	$	99,748	$	(2,150)

Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,790	$	(210)	$	9,790	$	(210)
State, county and municipal		2,452		(20)		3,985		(44)		6,437		(64)
Total	$	2,452	$	(20)	$	13,775	$	(254)	$	16,227	$	(274)

September 30, 2018
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 1,554 $ (29 ) $ 17,075 $ (564 ) $ 18,629 $ (593 )
U.S. Gov’t sponsored agencies - - 2,781 (36 ) 2,781 (36 )
State, county and municipal 57,016 (1,105 ) 19,410 (1,164 ) 76,426 (2,269 )
Corporate and other bonds 2,987 (34 ) 2,038 (35 ) 5,025 (69 )
Mortgage backed – U.S. Gov’t agencies 4,484 (46 ) 3,525 (234 ) 8,009 (280 )
Mortgage backed – U.S. Gov’t sponsored agencies 10,851 (230 ) 11,312 (537 ) 22,163 (767 )
Total $ 76,892 $ (1,444 ) $ 56,141 $ (2,570 ) $ 133,033 $ (4,014 )

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ - $ - $ 9,680 $ (320 ) $ 9,680 $ (320 )
State, county and municipal 11,486 (208 ) 1,230 (38 ) 12,716 (246 )
Total $ 11,486 $ (208 ) $ 10,910 $ (358 ) $ 22,396 $ (566 )

December 31, 2017
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Securities Available for Sale
U.S. Treasury issue and other U.S. Gov’t agencies $ 5,097 $ (36 ) $ 14,795 $ (323 ) $ 19,892 $ (359 )
U.S. Gov’t sponsored agencies 497 (3 ) 5,040 (21 ) 5,537 (24 )
State, county and municipal 20,740 (188 ) 9,569 (408 ) 30,309 (596 )
Corporate and other bonds - - 2,772 (36 ) 2,772 (36 )
Mortgage backed – U.S. Gov’t agencies 1,722 (25 ) 6,524 (144 ) 8,246 (169 )
Mortgage backed – U.S. Gov’t sponsored agencies 6,525 (111 ) 7,985 (262 ) 14,510 (373 )
Total $ 34,581 $ (363 ) $ 46,685 $ (1,194 ) $ 81,266 $ (1,557 )

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies $ - $ - $ 9,845 $ (155 ) $ 9,845 $ (155 )
State, county and municipal 1,485 (14 ) 1,262 (19 ) 2,747 (33 )
Total $ 1,485 $ (14 ) $ 11,107 $ (174 ) $ 12,592 $ (188 )

Table of Contents

The unrealized losses (impairments) in the investment portfolio at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are generally a result of market fluctuations of interest rates that occur daily. Interest rates increased consistently across the United States Treasury security yield curve during 2018, thereby increasing unrealized losses on securities. Likewise, these interest rates consistently decreased during the first quarter of 2019, thereby decreasing unrealized losses on the Company’s securities. The unrealized losses are from ~~243~~90 securities at ~~September 30, 2018.~~March 31, 2019. Of those, ~~234~~85 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. ~~Five~~Three investment grade asset-backed securities comprised of student loan pools included in corporate obligations and ~~four~~two corporate bonds make up the remaining securities with unrealized losses at ~~September 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 ~~$59.4~~ $54.0million and ~~$71.7~~$56.0 million at ~~September 30, 2018~~March 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 each of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were pledged to secure lines of credit at the Federal Reserve discount window. At each of ~~September 30, 2018~~March 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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were comprised of the following (dollars in thousands):


	September 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	$	216,203		22.46	%	$	227,542		24.16	%
Residential 1‑4 family											$	215,348	21.58	%	$	216,268	21.77	%
Commercial		358,490		37.25			366,331		38.89			379,112	37.99			379,904	38.23
Construction and land development		135,021		14.03			107,814		11.44			123,475	12.37			120,413	12.12
Second mortgages		7,179		0.75			8,410		0.89			6,966	0.70			6,778	0.68
Multifamily		52,255		5.43			59,024		6.27			57,931	5.81			59,557	5.99
Agriculture		8,066		0.84			7,483		0.79			10,780	1.08			8,370	0.84
Total real estate loans		777,214		80.76			776,604		82.44			793,612	79.53			791,290	79.63
Commercial loans		170,310		17.70			159,024		16.88			190,832	19.12			188,722	18.99
Consumer installment loans		13,135		1.36			5,169		0.55			11,923	1.19			12,048	1.21
All other loans		1,766		0.18			1,221		0.13			1,615	0.16			1,645	0.17
Total loans	$	962,425		100.00	%	$	942,018		100.00	%	$	997,982	100.00	%	$	993,705	100.00	%

The Company held ~~$18.0~~$17.0 and $17.4 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at ~~September 30, 2018~~March 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 ~~$1.3~~$1.2 million ~~and $824,000~~ at ~~September 30, 2018~~each 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.

Table of Contents

At ~~September 30, 2018~~March 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 ~~FASB~~Financial 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.

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

Three months ended Nine months ended
September 30, 2018 September 30, 2018 September 30, 2018

Recorded
Investment⁽¹⁾

Unpaid
Principal
Balance⁽²⁾

Related
Allowance

Average
Investment

Interest
Recognized

Average
Investment

Interest
Recognized

With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,579 $ 1,898 $ — $ 1,716 $ 11 $ 1,802 $ 33
Commercial 3,544 4,202 — 3,561 38 3,702 112
Construction and land development 464 464 — 426 — 318 —
Multifamily 2,559 2,559 — 2,559 31 1,279 92
Total real estate loans 8,146 9,123 — 8,262 80 7,101 237
Commercial loans — — — 136 — 589 —
Subtotal impaired loans with no valuation allowance 8,146 9,123 — 8,398 80 7,690 237
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,404 2,901 317 2,298 20 2,266 57
Commercial 1,653 2,127 472 1,600 4 1,063 13
Construction and land development 4,146 5,414 507 4,471 — 4,589 —
Agriculture — — — — — 34 —
Total real estate loans 8,203 10,442 1,296 8,369 24 7,952 70
Commercial loans 711 717 179 478 1 383 3
Consumer installment loans 5 5 1 3 — 4 —
Subtotal impaired loans with a valuation allowance 8,919 11,164 1,476 8,850 25 8,339 73
Total:
Mortgage loans on real estate:
Residential 1-4 family 3,983 4,799 317 4,014 31 4,068 90
Commercial 5,197 6,329 472 5,161 42 4,765 125
Construction and land development 4,610 5,878 507 4,897 — 4,907 —
Multifamily 2,559 2,559 — 2,559 31 1,279 92
Agriculture — — — — — 34 —
Total real estate loans 16,349 19,565 1,296 16,631 104 15,053 307
Commercial loans 711 717 179 614 1 972 3
Consumer installment loans 5 5 1 3 — 4 —
Total impaired loans $ 17,065 $ 20,287 $ 1,476 $ 17,248 $ 105 $ 16,029 $ 310


							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.

Table of Contents

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

Three months ended Nine months ended
December 31, 2017 September 30, 2017 September 30, 2017

Recorded
Investment⁽¹⁾

Unpaid
Principal
Balance⁽²⁾

Related
Allowance

Average
Investment

Interest
Recognized

Average
Investment

Interest
Recognized

With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family $ 1,901 $ 2,246 $ — $ 1,935 $ 7 $ 1,941 $ 21
Commercial 3,862 4,477 — 3,802 39 4,582 114
Agriculture — — — 129 — 65 —
Total real estate loans 5,763 6,723 — 5,866 46 6,588 135
Commercial loans 1,108 1,108 — 624 — 612 —
Subtotal impaired loans with no valuation allowance 6,871 7,831 — 6,490 46 7,200 135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family 2,216 2,640 290 2,373 20 2,426 59
Commercial 533 958 65 2,653 2 1,580 6
Construction and land development 4,277 5,537 556 4,290 — 4,595 —
Agriculture 68 71 8 33 — 16 —
Total real estate loans 7,094 9,206 919 9,349 22 8,617 65
Commercial loans 325 446 39 1,570 1 869 3
Consumer installment loans 7 7 1 20 — 91 —
Subtotal impaired loans with a valuation allowance 7,426 9,659 959 10,939 23 9,577 68
Total:
Mortgage loans on real estate:
Residential 1-4 family 4,117 4,886 290 4,308 27 4,367 80
Commercial 4,395 5,435 65 6,455 41 6,162 120
Construction and land development 4,277 5,537 556 4,290 — 4,595 —
Agriculture 68 71 8 162 — 81 —
Total real estate loans 12,857 15,929 919 15,215 68 15,205 200
Commercial loans 1,433 1,554 39 2,194 1 1,481 3
Consumer installment loans 7 7 1 20 — 91 —
Total impaired loans $ 14,297 $ 17,490 $ 959 $ 17,429 $ 69 $ 16,777 $ 203


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


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Nonaccruals	$	8,894	$	9,026	$	10,990	$	9,500
Trouble debt restructure and still accruing		8,171		5,271		5,654		8,359
Total impaired	$	17,065	$	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 nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ estimated interest income of ~~$167,000~~$223,000 and $224,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, 2018 and 2017, estimated interest income of $471,000 and $550,000,$160,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

Table of Contents

There were no loans greater than 90 days past due and still accruing interest at ~~September 30, 2018~~each 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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (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



											December 31, 2018
	September 30, 2018										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	$	635	$	1,530	$	2,165	$	214,038	$	216,203
Residential 1‑4 family											$	495	$	1,257	$	1,752	$	214,516	$	216,268
Commercial		84		2,243		2,327		356,163		358,490		551		2,123		2,674		377,230		379,904
Construction and land development		3		4,610		4,613		130,408		135,021		59		4,571		4,630		115,783		120,413
Second mortgages		—		—		—		7,179		7,179		—		—		—		6,778		6,778
Multifamily		2,559		—		2,559		49,696		52,255		2,559		—		2,559		56,998		59,557
Agriculture		—		—		—		8,066		8,066		—		—		—		8,370		8,370
Total real estate loans		3,281		8,383		11,664		765,550		777,214		3,664		7,951		11,615		779,675		791,290
Commercial loans		512		506		1,018		169,292		170,310		80		1,549		1,629		187,093		188,722
Consumer installment loans		22		5		27		13,108		13,135		10		—		10		12,038		12,048
All other loans		—		—		—		1,766		1,766		—		—		—		1,645		1,645
Total loans	$	3,815	$	8,894	$	12,709	$	949,716	$	962,425	$	3,754	$	9,500	$	13,254	$	980,451	$	993,705

December 31, 2017

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

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

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Activity in the allowance for loan losses on loans by segment for the three ~~and nine~~ months ended ~~September 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
			Provision
	December 31, 2017		Allocation		Charge-offs		Recoveries		March 31, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	3,466	$	(366)	$	—	$	15	$	3,115
Commercial		2,423		184		—		13		2,620
Construction and land development		1,247		364		—		1		1,612
Second mortgages		24		9		—		1		34
Multifamily		496		(298)		—		—		198
Agriculture		14		19		—		—		33
Total real estate loans		7,670		(88)		—		30		7,612
Commercial loans		1,139		(152)		(39)		14		962
Consumer installment loans		110		8		(45)		39		112
All other loans		3		7		—		—		10
Unallocated		47		225		—		—		272
Total loans	$	8,969	$	—	$	(84)	$	83	$	8,968

Three Months Ended September 30, 2018
June 30, 2018
Provision
Allocation
Charge-offs Recoveries September 30, 2018
Mortgage loans on real estate:
Residential 1-4 family $ 3,551 $ (392 ) $ (35 ) $ 42 $ 3,166
Commercial 2,189 (477 ) — 7 1,719
Construction and land development 1,429 (270 ) (116 ) 1 1,044
Second mortgages 32 (2 ) — 2 32
Multifamily 326 (2 ) — — 324
Agriculture 6 — — — 6
Total real estate loans 7,533 (1,143 ) (151 ) 52 6,291
Commercial loans 1,162 380 (6 ) 31 1,567
Consumer installment loans 169 20 (33 ) 11 167
All other loans 3 2 — — 5
Unallocated 222 741 — — 963
Total loans $ 9,089 $ — $ (190 ) $ 94 $ 8,993

Table of Contents

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

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

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

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

September 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 $ 317 $ 2,849 $ 3,166 $ 3,983 $ 212,220 $ 216,203
Commercial 472 1,247 1,719 5,197 353,293 358,490
Construction and land development 507 537 1,044 4,610 130,411 135,021
Second mortgages — 32 32 — 7,179 7,179
Multifamily — 324 324 2,559 49,696 52,255
Agriculture — 6 6 — 8,066 8,066
Total real estate loans 1,296 4,995 6,291 16,349 760,865 777,214
Commercial loans 179 1,388 1,567 711 169,599 170,310
Consumer installment loans 1 166 167 5 13,130 13,135
All other loans — 5 5 — 1,766 1,766
Unallocated — 963 963 — — —
Total loans $ 1,476 $ 7,517 $ 8,993 $ 17,065 $ 945,360 $ 962,425


													December 31, 2018
													Allowance for Loan Losses						Recorded Investment in Loans
	December 31, 2017												Individually		Collectively				Individually		Collectively
	Allowance for Loan Losses						Recorded Investment in Loans						Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1-4 family	$	290	$	3,176	$	3,466	$	4,117	$	223,425	$	227,542
Residential 1‑4 family													$	349	$	1,932	$	2,281	$	3,694	$	212,574	$	216,268
Commercial		65		2,358		2,423		4,396		361,935		366,331		482		1,328		1,810		5,052		374,852		379,904
Construction and land development		556		691		1,247		4,276		103,538		107,814		515		646		1,161		4,571		115,842		120,413
Second mortgages		—		24		24		—		8,410		8,410		—		20		20		—		6,778		6,778
Multifamily		—		496		496		—		59,024		59,024		—		371		371		2,559		56,998		59,557
Agriculture		8		6		14		68		7,415		7,483		—		17		17		—		8,370		8,370
Total real estate loans		919		6,751		7,670		12,857		763,747		776,604		1,346		4,314		5,660		15,876		775,414		791,290
Commercial loans		39		1,100		1,139		1,433		157,591		159,024		900		994		1,894		1,983		186,739		188,722
Consumer installment loans		1		109		110		7		5,162		5,169		—		152		152		—		12,048		12,048
All other loans		—		3		3		—		1,221		1,221		—		12		12		—		1,645		1,645
Unallocated		—		47		47		—		—		—		—		1,265		1,265		—		—		—
Total loans	$	959	$	8,010	$	8,969	$	14,297	$	927,721	$	942,018	$	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 ~~$18.0~~$17.0 million and ~~$18.0~~$17.4 million at ~~September 30, 2018~~March 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 defined~~well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Table of Contents

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

The following tables present the composition of loans by credit quality indicator at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (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

September 30, 2018
Pass
Special
Mention
Substandard Doubtful Total
Mortgage loans on real estate:
Residential 1-4 family $ 211,550 $ 3,016 $ 1,637 $ — $ 216,203
Commercial 350,683 4,072 3,735 — 358,490
Construction and land development 130,213 198 4,610 — 135,021
Second mortgages 7,084 95 — — 7,179
Multifamily 49,089 607 2,559 — 52,255
Agriculture 8,066 — — — 8,066
Total real estate loans 756,685 7,988 12,541 — 777,214
Commercial loans 167,431 2,342 537 — 170,310
Consumer installment loans 13,122 8 5 — 13,135
All other loans 1,766 — — — 1,766
Total loans $ 939,004 $ 10,338 $ 13,083 $ — $ 962,425


	December 31, 2017										December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	222,026	$	3,442	$	2,074	$	—	$	227,542
Residential 1‑4 family											$	211,832	$	3,179	$	1,257	$	—	$	216,268
Commercial		355,188		8,145		2,998		—		366,331		372,745		3,551		3,608		—		379,904
Construction and land development		103,356		182		4,276		—		107,814		115,650		192		4,571		—		120,413
Second mortgages		8,187		223		—		—		8,410		6,686		92		—		—		6,778
Multifamily		56,452		—		2,572		—		59,024		56,802		196		2,559		—		59,557
Agriculture		7,010		385		88		—		7,483		8,312		58		—		—		8,370
Total real estate loans		752,219		12,377		12,008		—		776,604		772,027		7,268		11,995		—		791,290
Commercial loans		156,604		1,171		1,249		—		159,024		184,004		1,798		2,920		—		188,722
Consumer installment loans		5,137		25		7		—		5,169		12,042		6		—		—		12,048
All other loans		1,221		—		—		—		1,221		1,645		—		—		—		1,645
Total loans	$	915,181	$	13,573	$	13,264	$	—	$	942,018	$	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's~~Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 2425 and 23 loans that met the definition of a TDR at ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

~~During~~The Company had no loan modifications considered to be TDRs during the three months ended ~~September 30, 2018, the Company modified one commercial real estate loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre-~~March 31, 2019 and post-modification balance of $126,000. During the nine months ended September 30, 2018, the Company modified one multifamily loan and one commercial real estate loan that were considered to be TDRs, which had a total pre- and post-modification balance of $2.6 million and $126,000, respectively. The Company restructured the terms for both loans.

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

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 nine~~ months ended ~~September 30, 2018 and 2017.~~March 31, 2018.

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

At ~~September 30, 2018,~~March 31, 2019, the Company had ~~1-4~~1‑4 family mortgages in the amount of ~~$112.3~~$111.9 million pledged as collateral to the Federal Home Loan Bank ~~with~~for a ~~lendable collateral value~~total borrowing capacity of ~~$89.8~~$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 ~~1-4~~1‑4 family, were analogized to meet the criteria of FASB ASC ~~310-30.~~310‑30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the outstanding contractual balance of the PCI loans was ~~$63.4~~$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
	September 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	$	35,053		89.55	%	$	39,805		89.79	%
Residential 1‑4 family											$	32,860	89.29	%	$	34,240	89.43	%
Commercial		759		1.94			547		1.23			733	1.99			746	1.95
Construction and land development		1,350		3.45			1,588		3.58			1,301	3.54			1,326	3.46
Second mortgages		1,735		4.43			2,136		4.82			1,668	4.53			1,729	4.52
Multifamily		247		0.63			257		0.58			241	0.65			244	0.64
Total real estate loans		39,144		100.00			44,333		100.00			36,803	100.00			38,285	100.00
Total PCI loans	$	39,144		100.00	%	$	44,333		100.00	%	$	36,803	100.00	%	$	38,285	100.00	%

~~During the three and nine months ended September 30, 2018, the Company recorded charge-offs of $63,000 on PCI loans in the residential 1-4 family loan category.~~ There was no activity in the allowance for loan losses on PCI loans for the three ~~and nine~~ months ended ~~September 30, 2017.~~

March 31, 2019 and 2018.

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

September 30, 2018 December 31, 2017
Allowance for
loan losses Recorded
investment in
loans Allowance for
loan losses Recorded
investment in
loans
Mortgage loans on real estate:
Residential 1-4 family $ 137 $ 35,053 $ 200 $ 39,805
Commercial — 759 — 547
Construction and land development — 1,350 — 1,588
Second mortgages — 1,735 — 2,136
Multifamily — 247 — 257
Total real estate loans 137 39,144 200 44,333
Total PCI loans $ 137 $ 39,144 $ 200 $ 44,333


	March 31, 2019				December 31, 2018
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	32,860	$	156	$	34,240
Commercial		—		733		—		746
Construction and land development		—		1,301		—		1,326
Second mortgages		—		1,668		—		1,729
Multifamily		—		241		—		244
Total real estate loans		156		36,803		156		38,285
Total PCI loans	$	156	$	36,803	$	156	$	38,285

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The change in the accretable yield balance for the ~~nine~~ three months ended ~~September 30, 2018~~March 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		(3,935	)
Reclassification to nonaccretable difference		(1,400	)
Balance, September 30, 2018	$	38,791
Balance, March 31, 2019				$	37,844

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

	September 30, 2018		December 31, 2017
Residential 1-4 family	$	665	$	486
					March 31, 2019		December 31, 2018
Residential 1‑4 family					$	455	$	314
Commercial		15		15		—		15
Construction and land development		1,052		2,290		770		770
Total other real estate owned	$	1,732	$	2,791	$	1,225	$	1,099

At ~~September 30, 2018,~~March 31, 2019, the Company had ~~$507,000~~$469,000 in residential ~~1-4~~1‑4 family loans and PCI loans that were in the process of foreclosure.

Note 6. Deposits

The following table provides interest bearing deposit information, by type, at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (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

September 30, 2018 December 31, 2017

NOW $ 147,026 $ 157,037
MMDA 128,277 143,363
Savings 94,972 93,980
Time deposits less than or equal to $250,000 491,044 437,810
Time deposits over $250,000 113,715 110,546
Total interest bearing deposits $ 975,034 $ 942,736

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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 nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ (dollars in thousands):

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

Beginning balance $ (1,517 ) $ (1,048 ) $ 302 $ (2,263 )
Other comprehensive loss before reclassifications (968 ) - (27 ) (995 )
Amounts reclassified from AOCI (53 ) - - (53 )
Net current period other comprehensive loss (1,021 ) - (27 ) (1,048 )
Ending balance $ (2,538 ) $ (1,048 ) $ 275 $ (3,311 )

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

Beginning balance $ 769 $ (756 ) $ (25 ) $ (12 )
Other comprehensive income before reclassifications 43 - 35 78
Amounts reclassified from AOCI (31 ) - - (31 )
Net current period other comprehensive income 12 - 35 47
Ending balance $ 781 $ (756 ) $ 10 $ 35

Nine months ended September 30, 2018

Unrealized
Gain (Loss)
on Securities

Defined
Benefit
Pension Plan

Gain (Loss) on
Cash Flow
Hedge

Total Other
Comprehensive
Income (Loss)

Beginning balance $ 954 $ (1,048 ) $ 137 $ 43
Other comprehensive (loss) income before reclassifications (3,428 ) - 138 (3,290 )
Amounts reclassified from AOCI (64 ) - - (64 )
Net current period other comprehensive (loss) income (3,492 ) - 138 (3,354 )
Ending balance $ (2,538 ) $ (1,048 ) $ 275 $ (3,311 )


													Three months ended March 31, 2019
													Unrealized		Defined		Gain (Loss) on		Total Other
	Nine months ended September 30, 2017												Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Unrealized Gain (Loss) on Securities			Defined Benefit Pension Plan			Gain (Loss) on Cash Flow Hedge			Total Other Comprehensive Income (Loss)			Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	(410	)	$	(767	)	$	(46	)	$	(1,223	)	$	(618)	$	(857)	$	196	$	(1,279)
Other comprehensive income before reclassifications		1,309			11			56			1,376			1,719		—		(74)		1,645
Amounts reclassified from AOCI		(118	)		-			-			(118	)		11		—		—		11
Net current period other comprehensive income		1,191			11			56			1,258			1,730		—		(74)		1,656
Ending balance	$	781		$	(756	)	$	10		$	35		$	1,112	$	(857)	$	122	$	377


	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 present~~table presents the effects of reclassifications out of AOCI on line items of consolidated income for the three ~~and nine~~ months ended ~~September 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
	September 30, 2018			September 30, 2017
Securities available for sale:
Unrealized gains on securities available for sale	$	(68	)	$	(48	)	Gain on securities transactions, net
Related tax expense		15			17		Income tax expense
	$	(53	)	$	(31	)	Net of tax
												Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income	Amount Reclassified from AOCI				Statement of Income
	Nine months ended							Three months ended
	September 30, 2018			September 30, 2017				March 31, 2019		March 31, 2018
Securities available for sale:
Unrealized gains on securities available for sale	$	(82	)	$	(180	)	Gain on securities transactions, net
Unrealized losses (gains) on securities available for sale								$	14	$	(30)	Loss (gain) on securities transactions, net
Related tax expense		18			62		Income tax expense		(3)		7	Income tax expense
	$	(64	)	$	(118	)	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

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

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

all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

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

FASB ASC 825,Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of ~~September 30, 2018.~~March 31, 2019.

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	$	—	$	—	$	—	$	—


	September 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	$	26,037	$	1,984	$	24,053	$	-
U.S. Gov’t sponsored agencies		8,424		-		8,424		-
U.S. Treasury issue									$	13,124	$	1,479	$	11,645	$	—
U.S. Government agencies										24,609		2,178		22,431		—
State, county and municipal		115,744		1,447		114,297		-		112,542		2,644		109,898		—
Corporate and other bonds		9,651		-		9,651		-
Mortgage backed – U.S. Gov’t agencies		14,254		-		14,254		-
Mortgage backed – U.S. Gov’t sponsored agencies		26,493		1,387		25,106		-
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		200,603		4,818		195,785		-		206,726		9,797		196,929		—
Cash flow hedge		353		-		353		-		253		—		253		—
Total assets at fair value	$	200,956	$	4,818	$	196,138	$	-	$	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 $ 27,183 $ - $ 27,183 $ -
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 18,515 - 18,515 -
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 September 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).

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The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing ~~company~~companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 1618 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

September 30, 2018
Total Level 1 Level 2 Level 3
Impaired loans $ 8,825 $ — $ — $ 8,825
Bank premises and equipment held for sale 1,252 — 700 552
Other real estate owned 1,732 — — 1,732
Total assets at fair value $ 11,809 $ — $ 700 $ 11,109
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 ~~September 30, 2018~~March 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/or~~and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. When the fair value of the collateral is based on an observable market price or a current appraised value without further adjustment for unobservable inputs, the Company records the impaired loan within Level 2.

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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. ~~At September 30, 2018 and December 31, 2017, the Level 3 weighted average adjustments related to impaired loans were 19.0% and 38.0%, respectively.~~ 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.

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.

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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):

September 30, 2018
Carrying Value
Estimated Fair
Value
Level 1 Level 2 Level 3
Financial assets:
Securities held to maturity $ 43,559 $ 43,195 $ — $ 43,195 $ —
Loans, net of allowance 953,432 958,935 — — 958,935
PCI loans, net of allowance 39,007 42,519 — — 42,519

Financial liabilities:
Interest bearing deposits 975,034 973,178 — 973,178 —
Borrowings 67,944 67,591 — 67,591 —


											March 31, 2019
	December 31, 2017												Estimated Fair
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3		Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	46,146	$	46,888	$	—	$	46,888	$	—	$	41,458	$	42,045	$	—	$	42,045	$	—
Loans, net of allowance		933,049		933,938		—		927,329		6,609		989,321		979,084		—		—		979,084
PCI loans, net of allowance		44,133		48,655		—		—		48,655		36,647		42,232		—		—		42,232

Financial liabilities:
Interest bearing deposits		942,736		943,037		—		943,037		—		1,002,415		1,000,919		—		1,000,919		—
Borrowings		105,553		105,363		—		105,363		—		73,196		73,073		—		73,073		—


	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 nine~~ months ended ~~September 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 September 30, 2018
										Weighted Average
								Net Income		Common Shares	Per Common
								(Numerator)		(Denominator)	Share Amount
For the three months ended March 31, 2019
Basic EPS	$	3,955		22,115	$	0.18		$	3,503	22,141	$	0.16
Effect of dilutive stock awards		—		512		(0.01	)		—	289		—
Diluted EPS	$	3,955		22,627	$	0.17		$	3,503	22,430	$	0.16

For the three months ended September 30, 2017
For the three months ended March 31, 2018
Basic EPS	$	2,416		22,041	$	0.11		$	2,594	22,076	$	0.12
Effect of dilutive stock awards		—		501		—			—	445		—
Diluted EPS	$	2,416		22,542	$	0.11		$	2,594	22,521	$	0.12

For the nine months ended September 30, 2018
Basic EPS	$	10,331		22,095	$	0.47
Effect of dilutive stock awards		—		481		(0.01	)
Diluted EPS	$	10,331		22,576	$	0.46

For the nine months ended September 30, 2017
Basic EPS	$	7,843		22,000	$	0.36
Effect of dilutive stock awards		—		491		(0.01	)
Diluted EPS	$	7,843		22,491	$	0.35

~~There~~Antidilutive common shares issuable under awards or options of 585,000 and 279,000 were ~~no antidilutive exclusions~~excluded from the computation of diluted earnings per common share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

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Note 10. Employee Benefit Plan

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

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

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three ~~and nine~~ months ended ~~September 30,~~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 Nine months ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Interest cost $ 39 $ 39 $ 117 $ 117
Expected return on plan assets (59 ) (70 ) (177 ) (210 )
Amortization of prior service cost 1 1 3 3
Recognized net loss due to settlement — — — —
Recognized net actuarial loss 15 12 45 36
Net periodic benefit income $ (4 ) $ (18 ) $ (12 ) $ (54 )

Note 11. Cash Flow Hedge

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

The swap was entered into with a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had $0 ~~and $390,000~~ of cash pledged as collateral for each of the periods ended ~~September 30, 2018~~March 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 nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. The fair value of the Company’s cash flow hedge was an unrealized gain of ~~$353,000~~$159,000 and ~~$177,000~~$253,000 at ~~September 30, 2018~~March 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.

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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.

Brokerage fees and commissions

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

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three ~~and nine~~ months ended ~~September 30,~~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 Nine months ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts $ 411 $ 376 $ 1,192 $ 1,130
Interchange and ATM fees 215 183 626 535
Brokerage fees and commissions 76 68 272 208
Noninterest income (in-scope of Topic 606) 702 627 2,090 1,873
Noninterest income (out-of-scope of Topic 606) 509 371 1,289 1,155
Total noninterest income $ 1,211 $ 998 $ 3,379 $ 3,028

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Note 13. ~~Bank Premises~~Leases

On January 1, 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and ~~Equipment Held~~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 ~~Sale~~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, Virginia~~following 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, also~~March 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 marketed~~weighted average remaining lease term and weighted average discount rate for ~~sale. The book value~~operating 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 value~~gross operating lease liability at ~~September 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.

~~Also included in bank premises and equipment held for sale is a piece~~

Table of land the Company was holding as a possible future branch site. The Company has decided not to pursue that location and is marketing the property. The book value of $700,000 reflects the lower of cost or fair market value at September 30, 2018.Contents

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

The following discussion and analysis of the financial condition at ~~September 30, 2018~~March 31, 2019 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three ~~and nine~~ months ended ~~September 30, 2018~~March 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-K~~10‑K for the year ended December 31, ~~2017.~~2018.

OVERVIEW

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;

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the interest rate environment;

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

real estate values;

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

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

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

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

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

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

consumer profiles and spending and savings habits;

levels of fraud in the banking industry;

the level of attempted cyber attacks in the banking industry;

the securities and credit markets;

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

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

inflation;

technology; and

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2017~~2018 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

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

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense,

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

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

Allowance for Loan Losses on Loans

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

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

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

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

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

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

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

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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.

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

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under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

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

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

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, ~~and~~which is not recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

Other Real Estate Owned

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

Income Taxes

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

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

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beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no such interest or penalties during the three ~~and nine~~ months ended ~~September 30, 2018~~March 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 the Bank are subject to U.S. federal income tax as well as Virginia and Maryland state income tax. All years from ~~2014~~2015 through ~~2017~~2018 are open to examination by the respective tax authorities.

RESULTS OF OPERATIONS

Overview

Net income ~~of $4.0~~was $3.5 million for the ~~third~~first 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 increase~~primarily the result of ~~$1.5~~a $1.7 million or 63.7%, over net income of $2.4 million for the third quarter of 2017. Pre-tax net income increased $1.6 million, or 46.9%, in the third quarter of 2018. Interest and dividend income increased by $1.8 million in the third quarter of 2018 compared with the same period in 2017, driven by interest and fees on loans, which increased $1.8 million. Noninterest income increased by $213,000 year-over-year, and noninterest expenses declined by $248,000. Offsetting these increases was an increase in interest income ~~tax expense, which was $26,000 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 $10.3 million for the first nine months of 2018 compared with $7.8 million for the same period in 2017. This is an increase of $2.5 million, or 31.7%. Increases were in interest~~ and ~~dividend income, which increased by $4.2 million, or 10.6%, and in noninterest income, which increased by $351,000, or 11.6%. Also positively affecting earnings were~~ a reduction of ~~$150,000~~$526,000 in ~~the provision for loan losses and a decrease of $389,000 in income tax expense when comparing the two periods.~~noninterest expenses. Offsetting these increases to net income were an increase of ~~$1.9~~$1.1 million in interest expense, ~~and~~ an increase of ~~$629,000~~$256,000 in income tax expense and a decrease of $19,000 in noninterest expense. By comparing pre-tax income for the two periods, most of the effect of the Tax Cuts and Jobs Act of 2017 is eliminated. This comparison reflects that income before income taxes increased by $2.1 million, or 19.9%, for the first nine 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.”

Net interest income increased ~~$954,000,~~$658,000, or ~~8.7%~~5.7%, from the ~~third~~first quarter of ~~2017~~2018 to the ~~third~~first quarter of ~~2018.~~2019. Net interest income was ~~$12.0~~$12.1 million in the ~~third~~first quarter of ~~2018~~2019 compared with ~~$11.0~~$11.5 million for the same period in ~~2017.~~2018. Interest ~~and dividend~~ income increased ~~$1.8~~$1.7 million, or ~~13.1%~~12.3%, over this time period. The increase in interest ~~and dividend~~ income was generated by an increase of ~~$70.3~~$51.1 million, or ~~5.8%~~4.1%, in the level of average earning assets. The yield on earning assets increased from ~~4.51%~~4.60% in the ~~third~~first quarter of ~~2017~~2018 to ~~4.76%~~4.95% in the ~~third~~first quarter of ~~2018.~~2019. The average balance of loans, excluding PCI loans, increased ~~$96.3~~$55.6 million, or ~~11.1%~~5.9%, from ~~$869.5~~$943.4 million in the ~~third~~first quarter of ~~2017~~2018 to ~~$965.8~~$999.0 million in the ~~third~~first quarter of ~~2018.~~2019. Interest ~~income~~and dividends on securities ~~increased $119,000 and~~ was ~~$1.9~~$2.0 million in the ~~third~~first quarter of ~~2018, compared to~~2019, an increase of $233,000, or 13.2%, over interest and dividends on securities of $1.8 million in the ~~third~~first quarter of ~~2017. On~~2018. On a ~~tax-equivalent~~tax equivalent basis, the yield on investment securities was ~~3.21%~~3.35% in the ~~third~~first quarter of 2019 and 2.98% in the first quarter of 2018, both of which were based on a ~~21% tax rate, and 3.10% in the third quarter of 2017, based on a 34%~~21.0% income tax rate. Interest on deposits in other banks increased by $29,000 in the third quarter of 2018 over the same period in 2017 primarily due to an increase in the return on those balances from 1.40% in 2017 to 2.45% in 2018.

Interest on PCI loans was $1.3 million in the ~~third~~first quarter of ~~2018~~2019 compared with $1.4 million in the ~~third~~first quarter of ~~2017.~~2018. The average balance of the PCI portfolio declined ~~$7.7~~$5.5 million during the year-over-year comparison period.

Interest expense increased ~~$801,000,~~$1.1 million, or ~~33.9%~~40.9%, when comparing the ~~third~~first quarter of ~~2017~~2018 and the ~~third~~first quarter of ~~2018.~~2019. Interest expense on deposits increased ~~$646,000,~~$1.1 million, or ~~31.5%~~50.9%, as the average balance of interest bearing deposits increased ~~$33.5~~$55.7 million, or ~~3.6%~~5.9%. ~~The increase in deposit cost was driven by an increase in~~Additionally, the average balance of ~~demand – interest bearing~~lower cost savings and money market accounts ~~which~~decreased by $17.8 million while the average balance of higher cost time deposits increased ~~a combined $4.2~~by $71.4 million, ~~year-over-year. Likewise,~~or 12.9%. The shift in deposit balances increased the cost of ~~these balances increased $13,000,~~interest bearing deposits from ~~0.40%~~0.92% in the first quarter of 2018 to ~~0.42%, over~~1.31% in the same time frame. Higher cost time deposit average balances increased over the comparison period by $25.7 million, and expense on this category increased by $631,000, resulting in an increase in cost from 1.19% to 1.56%. The average balancefirst quarter of 2019.

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FHLB and other borrowings ~~increased $13.1~~decreased, on average, $32.3 million ~~year-over-year,~~year over year, and there was an increase in the rate paid, from ~~1.57%~~1.74% in the ~~third~~first quarter of ~~2017~~2018 to ~~1.98%~~2.20% in the ~~third~~first quarter of ~~2018. This resulted in an~~2019. The impact of the lower average balances lowered borrowing costs but was partially mitigated by the increase in ~~the~~rates. The result was a decrease of $22,000 in short-term borrowing costs and interest expense ~~of this wholesale funding source of $144,000, to $452,000 in the third quarter of 2018. The average balance of~~on FHLB ~~and other borrowings was $90.8 million in the third quarter of 2018.~~advances. Overall, the ~~Company’s~~Bank’s cost of interest bearing liabilities increased 2638 basis points, from ~~0.92%~~1.00% in the ~~third~~first quarter of ~~2017~~2018 to ~~1.18%~~1.38% in the ~~third~~first quarter of ~~2018.~~2019.

The ~~tax-equivalent~~tax equivalent net interest margin increased ~~three~~five basis points, from ~~3.74%~~3.76% in the ~~third~~first quarter of 2018 to ~~3.77%~~3.81% in the ~~third~~first quarter of ~~2018. The~~2019. Conversely, the interest spread decreased from ~~3.59%~~3.60% to ~~3.58%~~3.57% over the same time period. ~~Net interest~~The increase in the margin, ~~increased~~ despite ~~the~~a decrease in ~~interest~~ spread, ~~because growth in the average balance~~was precipitated by increases of ~~earning assets of $70.3~~$12.1 million, ~~was partially funded by growth~~or 8.2%, in the average balance of noninterest bearing deposits, ~~of $18.9 million.~~

~~For the first nine months of 2018 compared with the same period in 2017, net interest income increased $2.2~~and $14.9 million, or 6.8%, and was $35.1 million. The yield on earning assets was 4.67% for the first nine months of 2018 compared with 4.55% for the first nine months of 2017. Interest and fees on loans of $34.1 million in the first three quarters of 2018 was an increase of $4.4 million compared with $29.7 million for the same period in 2017. Interest and fees on PCI loans declined $418,000 over this same time frame. Securities income increased $88,000 for the first nine months of 2018 compared with the same period in 2017. Interest on deposits in other banks increased $60,000 for the first three quarters of 2018 over the same period in 2017 primarily due to an increase in the return on those balances from 1.22% to 2.08%. On a tax-equivalent basis, income on securities decreased $402,000, primarily the result of less benefit on bank qualified municipal securities from the enactment of the Tax Cut and Jobs Act in December 2017. The tax-equivalent yield on the portfolio was 3.10% for the first three quarters of 2018, based on a 21% tax rate, and 3.14% for the same period in 2017, based on a 34% tax rate.

Interest expense of $8.6 million represented an increase of $1.9 million in the first nine months of 2018 compared with the same period in 2017. Average interest bearing liabilities increased $50.9 million, or 5.0%, as loan growth was fueled by an increase of $42.0 million, or 16.6%11.9%, in the average balance in shareholders’ equity. Both of ~~demand -~~these categories carry no direct interest ~~bearing accounts. This has allowed more expensive time deposit balances~~expense, but the increase was used to ~~decrease, on average, by $11.4 million, or 2.0%, resulting~~fund growth in ~~a $33.1 million increase in the average balance of total deposits.~~

~~The tax equivalent net interest margin declined from 3.80% for the first nine months of 2017 to 3.76% for the first nine months of 2018. While the yield on~~ earning assets increased by 12 basis points over this time frame, the competition for funding has pushed the cost of interest bearing liabilities up, from 0.89% to 1.09%. Likewise, the net interest spread declined and was 3.58% for the first nine months of 2018 versus 3.66% for the first nine months of 2017.assets.

The following ~~tables set~~table sets forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. The ~~tables~~table also ~~set~~sets forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield.

(Dollars in thousands) Three months ended September 30, 2018 Three months ended September 30, 2017
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 965,763 $ 11,893 4.89 % $ 869,501 $ 10,127 4.62 %
PCI loans 39,614 1,265 12.49 47,358 1,423 11.76
Total loans 1,005,377 13,158 5.19 916,859 11,550 5.00
Interest bearing bank balances 15,244 94 2.45 18,333 65 1.40
Federal funds sold 91 - 1.92 105 1 1.21
Securities (taxable) 179,738 1,364 3.04 182,703 1,171 2.56
Securities (tax exempt)⁽¹⁾ 73,985 669 3.62 86,106 912 4.24
Total earning assets 1,274,435 15,285 4.76 1,204,106 13,699 4.51
Allowance for loan losses (9,219 ) (9,523 )
Non-earning assets 94,804 89,935
Total assets $ 1,360,020 $ 1,284,518

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 284,407 297 0.42 $ 280,253 284 0.40
Savings 94,487 62 0.26 90,774 60 0.26
Time deposits 593,450 2,340 1.56 567,800 1,709 1.19
Total interest bearing deposits 972,344 2,699 1.10 938,827 2,053 0.87
Short-term borrowings 2,163 13 2.32 381 2 1.67
FHLB and other borrowings 90,761 452 1.98 77,617 308 1.57
Total interest bearing liabilities 1,065,268 3,164 1.18 1,016,825 2,363 0.92
Noninterest bearing deposits 157,252 138,330
Other liabilities 6,509 5,395
Total liabilities 1,229,029 1,160,550
Shareholders' equity 130,991 123,968

Total liabilities and shareholders' equity $ 1,360,020 $ 1,284,518
Net interest earnings $ 12,121 $ 11,336
Interest spread 3.58 % 3.59 %
Net interest margin 3.77 % 3.74 %

Tax equivalent adjustment:
Securities $ 140 $ 310


	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.~~

Table of Contents

(Dollars in thousands) Nine months ended September 30, 2018 Nine months ended September 30, 2017
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned/
Sheet Expense Paid Sheet Expense Paid
ASSETS:
Loans $ 956,109 $ 34,122 4.77 % $ 856,465 $ 29,676 4.63 %
PCI loans 41,366 3,937 12.55 49,117 4,355 11.69
Total loans 997,475 38,059 5.10 905,582 34,031 5.02
Interest bearing bank balances 13,063 203 2.08 15,597 143 1.22
Federal funds sold 79 1 1.80 97 1 1.08
Securities (taxable) 177,039 3,816 2.87 182,724 3,577 2.61
Securities (tax exempt)⁽¹⁾ 77,370 2,094 3.61 85,607 2,735 4.26
Total earning assets 1,265,026 44,173 4.67 1,189,607 40,487 4.55
Allowance for loan losses (9,222 ) (9,647 )
Non-earning assets 91,994 89,261
Total assets $ 1,347,798 $ 1,269,221

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing $ 295,683 957 0.43 $ 253,638 579 0.31
Savings 93,902 184 0.26 91,473 181 0.27
Time deposits 568,983 6,056 1.42 580,346 5,016 1.16
Total interest bearing deposits 958,568 7,197 1.00 925,457 5,776 0.83
Short-term borrowings 3,091 50 2.17 994 9 1.21
FHLB and other borrowings 99,773 1,392 1.84 84,072 905 1.44
Total interest bearing liabilities 1,061,432 8,639 1.09 1,010,523 6,690 0.89
Noninterest bearing deposits 152,740 132,868
Other liabilities 5,992 5,487
Total liabilities 1,220,164 1,148,878
Shareholders' equity 127,634 120,343

Total liabilities and shareholders' equity $ 1,347,798 $ 1,269,221
Net interest earnings $ 35,534 $ 33,797
Interest spread 3.58 % 3.66 %
Net interest margin 3.76 % 3.80 %

Tax equivalent adjustment:
Securities $ 440 $ 930

~~(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.

There was no provision for loan losses on the loan portfolio, excluding PCI loans, during either of the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. The absence of a provision through the first ~~nine~~three months of ~~2018~~2019 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 nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net charge-offs of ~~$96,000~~$322,000 in the ~~third~~first quarter of ~~2018,~~2019, compared with net charge-offs of ~~$972,000~~$1,000 in the ~~third~~first quarter of ~~2017.~~2018. Total charge-offs were ~~$190,000~~$578,000 for the ~~third~~first quarter of ~~2018~~2019 compared with ~~$1.1 million~~$84,000 in the ~~third~~first quarter of ~~2017.~~2018. Recoveries of previously charged-off loans were ~~$94,000~~$256,000 for the ~~third~~first 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 to $62,000 in the first quarter of 2019. Gain (loss) on securities transactions, net decreased $44,000 year over year as losses of $14,000 were realized in the first 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 ~~$89,000~~$128,000 in the ~~third~~first quarter of ~~2017.~~

~~There were net recoveries~~2018. The increase of ~~$24,000 for~~$48,000 was the ~~nine months ended September 30, 2018 for loans, excluding PCI loans, compared~~result of a $34,000 increase in brokerage fees and commissions combined with ~~net charge-offs~~an increase of $976,000 for the nine months ended September 30, 2017. Total charge-offs were $394,000 for the nine months ended September 30, 2018 compared with $1.4 million for the nine months ended September 30, 2017. Recoveries of previously charged-off loans were $418,000 for the nine months ended September 30, 2018 compared with $380,000 for the nine months ended September 30, 2017.

~~Noninterest Income~~

~~Noninterest~~$13,000 in dividend income ~~increased $213,000, or 21.3%, and was $1.2 million~~from investments in ~~the third quarter of 2018 compared with $998,000 in the third quarter of 2017.~~partnerships. Service charges and fees ~~exhibited the largest increase, $68,000,~~were $609,000 in the ~~third~~first quarter of ~~2018 compared with the same period in 2017~~2019 and ~~were $626,000. Gain on sale~~increased from $581,000, or 4.8%, as a result of ~~loans was $65,000~~an increase in the ~~third~~volume of new accounts. There was an increase of $15.7 million, or 10.4%, year over year, in noninterest bearing account balances.

Noninterest Expense

Noninterest expenses decreased $526,000, or 5.6%, when comparing the first quarter of ~~2018 compared with $0 in the third quarter of 2017. Mortgage loan income increased $38,000 year-over-year, from $59,000 in the third quarter of 2017~~2019 to ~~$97,000 in~~ the same period in 2018. ~~Other noninterest income, once again as~~The largest component of the change was a ~~result~~reduction of ~~improved brokerage commission~~$468,000 in salaries and ~~investment dividend income, increased $26,000 year-over-year.~~

~~Noninterest income~~employee benefits. The decrease year over year was ~~$3.4 million for~~largely attributable to abnormally higher group benefit costs in the first ~~nine months~~quarter of 2018, ~~an increase~~which accounted for $446,000 of ~~$351,000, or 11.6%, compared with $3.0~~the $468,000 decrease. Other operating expenses of $1.4 million ~~for~~in the first ~~nine months~~quarter of ~~2017. Service charges and fees increased $153,000 for the first nine months~~2019 was a decrease of ~~2018 compared with~~$211,000 from the same period in ~~2017~~2018. Telephone and ~~were $1.8 million. Mortgage loan income of $288,000 for~~internet data declined $187,000 year over year as a telephone provider contract was terminated in the first ~~nine months~~quarter of 2018, with associated breakage fees, but resulted in a much lower quarterly expense thereafter. Offsetting these decreases was an increase ~~of $125,000 from $163,000 for the same period~~ in ~~2017. Gain on sale of loans was~~occupancy expenses, which increased $118,000 ~~for~~year over year, and were $930,000 in the first ~~nine months~~quarter of ~~2018 versus $0 for the same period~~2019 compared with $812,000 in ~~2017. Other noninterest income, driven by higher brokerage commission and investment dividend income, reflected an increase of $74,000 for~~ the first nine months of 2018 over the same period in 2017. Partially offsetting these increases was a decline of $98,000 in gain on securities transactions, net, which were $82,000 for the first nine months of 2018.

~~Noninterest Expense~~

~~Noninterest expenses decreased $248,000, or 2.9%, when comparing the third~~ quarter of ~~2018 to~~2018. The opening of new branches since the same period in 2017. Other operating expenses decreased $265,000, or 16.1%. Bank franchise tax declined by $121,000 over the comparison period due to refunds received on amended returns during the third quarter of 2018, as did telephone and internet line expense, which decreased by $114,000 as a result of bringing line monitoring management in-house during the secondfirst quarter of 2018 and ~~credit expense, which decreased by $67,000. Occupancy expense decreased by $77,000 year-over-year and amortization~~the new lease accounting rules that took

Table of ~~intangibles decreased $62,000 year-over-year. Offsetting these decreases to noninterest expenses~~Contents

effect in the first quarter of 2019 were ~~increases~~the drivers of ~~$78,000~~the increase. These openings also resulted in ~~salaries and employee benefits, $61,000~~an increase year over year in equipment expenses, ~~and $26,000 in other real estate expenses, net.~~which increased $67,000, from $314,000 to $381,000.

Noninterest expenses were $25.8 million for the first nine months of 2018, as compared with $25.2 million for the same period in 2017. This is an increase of $629,000, or 2.5%. Salaries and employee benefits increased $1.5 million for the first nine months of 2018 compared with the same period in 2017. Within this increase, $668,000 was related to group hospital and medical insurance increases and $576,000 was related to increases in total salaries. Also impacting noninterest expenses for the first nine months of 2018 compared with the same period in 2017 were increases of $175,000 in equipment expenses and $32,000 in occupancy expenses reflecting the opening of three new branches during 2017. Other real estate expenses, net, also increased $60,000 during the same period. These increases were offset by a decline of $878,000 in amortization of intangibles, which became fully amortized in 2017, and a decline of $273,000 in other operating expenses. Significant decreases in 2018 in other operating expenses were declines of $160,000 in telephone and internet line expense due to the in-house change noted above, $135,000 in credit expense, $97,000 in stationery, printing and supplies and $79,000 in bank franchise tax. Other expenses included in other operating expenses increased $140,000 for the first nine months of 2018 compared with the same period in 2017 as did outside vendor fees, which increased by $92,000.

Income Taxes

Income tax expense was ~~$945,000~~$796,000 for the three months ended ~~September 30, 2018,~~March 31, 2019, compared with income tax expense of ~~$919,000 for the third quarter of 2017. For the nine months ended September 30, 2018, income tax expense was $2.3 million compared with $2.7 million~~$540,000 for the first ~~nine months~~quarter of ~~2017.~~2018. The effective tax rate for the ~~third~~first quarter of ~~2018~~2019 was ~~19.3% versus 27.6% in~~18.5% compared with 17.2% for the ~~third~~first quarter of 2017. For the first nine months of 2018, the effective tax rate was 18.2% and, for the same period in 2017, it was 25.5%. The decrease in the Company’s effective tax rate resulted principally from the decrease in its applicable federal corporate income tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act enacted in December 2017.2018.

FINANCIAL CONDITION

General

Total assets increased ~~$14.2~~$5.3 million, or ~~1.1%~~0.4%, to ~~$1.350~~$1.399 billion at ~~September 30, 2018~~March 31, 2019 when compared ~~with~~to December 31, ~~2017.~~2018. Total loans, excluding PCI loans, were ~~$962.4~~$998.0 million at ~~September 30, 2018,~~March 31, 2019, increasing ~~$20.4~~$4.3 million, or ~~2.2%~~0.4%, from year end ~~2017.~~2018. Total PCI loans were ~~$39.1~~$36.8 million at ~~September 30, 2018~~March 31, 2019 versus ~~$44.3~~$38.3 million at ~~year end 2017.~~December 31, 2018.

During the first ~~nine months~~quarter of ~~2018, loans grew by $20.4 million, or 2.2%. Construction~~2019, construction and land development loans, totaling $123.5 million, grew by ~~$27.2~~$3.1 million, or ~~25.2%~~2.5%. Agriculture loans secured by real estate grew by $2.4 million, or 28.8%, ~~commercial~~and totaled $10.8 million at March 31, 2019. Commercial loans grew ~~by $11.3~~$2.1 million ~~or 7.1%,~~ and ~~consumer installment~~were $190.8 million at March 31, 2019. Offsetting this loan growth was a decline in multifamily loans, ~~grew by $8.0 million. Offsetting these increases were declining balances in~~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, which~~loans declined by ~~$11.3~~$920,000 and ended the period at $215.3 million, or ~~5.0%, commercial mortgage~~21.6% of the portfolio. Commercial real estate loans, ~~which declined by $7.8~~the largest category of loans, at $379.1 million, or ~~2.1%, and multifamily~~38.0% of gross loans ~~which decreased $6.8 million, or 11.5%. In March 2018,~~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 addition~~first quarter of ~~these loans brought an increase in diversification to the portfolio.~~2019.

The Company’s securities portfolio, excluding restricted equity securities, ~~of $7.9 million,~~ declined ~~$6.8~~$7.3 million since year end ~~2017~~2018 to ~~total $244.2~~$241.6 million at ~~September 30, 2018.~~March 31, 2019. Net ~~gains~~losses of ~~$68,000~~$14,000 were ~~realized~~recognized during the ~~third~~first quarter of ~~2018 through sales and call activity. For the first nine months of 2018, there were~~2019 compared with net gains of ~~$82,000 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 ~~market~~fair value of the AFS portfolio was ~~$200.6~~$200.1 million at ~~September 30, 2018~~March 31, 2019 and ~~$204.8~~$206.7 million at December 31, ~~2017.~~2018. At ~~September 30, 2018,~~March 31, 2019, the Company had a net unrealized ~~loss~~gain on the AFS portfolio of ~~$3.3~~$1.4 million compared with a net unrealized ~~gain~~loss of ~~$1.2 million~~$792,000 at December 31, ~~2017.~~2018. Municipal securities comprised ~~57.7%~~55.9% of the total AFS portfolio at ~~September 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 ~~$24.3~~$35.8 million and ~~$22.0~~$34.2 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. There were federal funds sold of $240,000 at ~~September 30, 2018. There were~~March 31, 2019 and federal funds purchased of ~~$10.0 million at September 30, 2018 and $4.8~~$19.4 million at December 31, ~~2017.~~2018. Interest bearing bank balances were ~~$11.2~~$18.8 million at ~~September 30, 2018~~March 31, 2019 compared with ~~$7.3~~$15.9 million at December 31, ~~2017.~~2018.

Interest bearing deposits at ~~September 30, 2018~~March 31, 2019 were ~~$975.0 million,~~$1.002 billion, an increase of ~~$32.3~~$2.5 million from December 31, ~~2017.~~2018. Time deposits less than or equal to $250,000 ~~have shown~~increased by $14.5 million, or 3.0%, during the ~~largest dollar volume growth during 2018 with $53.2~~first quarter of 2019, followed by increases of $4.9 million in ~~additional balances and totaling $491.0 million at quarter end. Time~~time deposits over $250,000 ~~grew by $3.2~~and $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 $113.7 million at September 30, 2018.~~MMDA balances as higher rates attracted consumers to obtain higher returns on their deposit balances. NOW accounts ~~decreased~~declined $14.3 million during the first quarter of 2019 while MMDA balances fell by $10.0 million and were $147.0 million at September 30, 2018. The overall increase has allowed the Company to decrease balances with brokered time deposits by $12.0 million over the last year, and those balances were only $2.5 million at September 30, 2018.$3.9 million.

FHLB advances were ~~$63.8~~$69.1 million at ~~September 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.

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Shareholders’ equity was ~~$131.8~~$142.3 million at ~~September 30, 2018~~March 31, 2019 and ~~$124.0~~$137.5 million at December 31, ~~2017. Shareholder’s~~2018. Shareholders’ equity to assets was ~~9.8%~~10.2% at ~~September 30, 2018~~March 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.

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 ~~$10.6~~$12.2 million at ~~September 30, 2018~~March 31, 2019 and net charge-offs were ~~$96,000~~$322,000 for the three months ended ~~September 30, 2018 and net recoveries were $24,000 for the nine months ended September 30, 2018.~~March 31, 2019. This compares with nonperforming assets of ~~$11.8~~$10.6 million at and net ~~charge-offs~~recoveries of ~~$1.1 million~~$14,000 for the year ended December 31, ~~2017.~~

2018.

Nonperforming loans were ~~$8.9~~$11.0 million at ~~September 30, 2018,~~March 31, 2019, a ~~$132,000 decrease~~$1.5 million increase from ~~$9.0~~$9.5 million at December 31, ~~2017.~~2018. The ~~$132,000 decrease~~$1.5 million increase in nonperforming loans since December 31, ~~2017~~2018 was the net result of ~~$3.1~~$3.4 million in additions to nonperforming loans and ~~$3.2~~$1.9 million in reductions. The increase related mainly to two ~~residential 1-4 family construction relationships comprised of four~~commercial loans totaling ~~$1.5 million,~~$616,000 and one ~~commercial~~multifamily real estate ~~relationship~~ loan of ~~$964,000, and one commercial relationship loan of $285,000.~~$2.6 million. With respect to the reductions in nonperforming loans, ~~$1.3 million~~$97,000 were payments to existing credits, ~~$266,000~~$542,000 were charge-offs, and $1.3 million were paid ~~off, and $360,000 returned to accruing status.~~

off.

The allowance for loan losses, excluding PCI, equaled ~~101.11%~~78.8% of nonaccrual loans at ~~September 30, 2018~~March 31, 2019 compared with ~~99.37%~~94.6% at December 31, ~~2017.~~2018. The ratio of nonperforming assets to loans and OREO ~~decreased~~increased 15 basis points. The ratio was ~~1.10%~~1.22% at ~~September 30, 2018~~March 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.

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See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, total impaired loans, excluding PCI loans, equaled ~~$17.1~~$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):

September 30, 2018 December 31, 2017
Nonaccrual loans $ 8,894 $ 9,026
Loans past due 90 days and accruing interest — —
Total nonperforming loans 8,894 9,026
OREO 1,732 2,791
Total nonperforming assets $ 10,626 $ 11,817

Accruing troubled debt restructure loans $ 8,171 $ 5,271

Balances
Specific reserve on impaired loans 1,476 959
General reserve related to unimpaired loans 7,517 8,010
Total allowance for loan losses 8,993 8,969

Average loans during the year, net of unearned income 956,109 870,258

Impaired loans 17,065 14,297
Non-impaired loans 945,360 927,721
Total loans, net of unearned income 962,425 942,018

Ratios
Allowance for loan losses to loans 0.93 % 0.95 %
Allowance for loan losses to nonaccrual loans 101.11 99.37
General reserve to non-impaired loans 0.80 0.86
Nonaccrual loans to loans 0.92 0.96
Nonperforming assets to loans and OREO 1.10 1.25
Net (recoveries) charge-offs to average loans (0.00 ) 0.12

The Company grants troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At September 30, 2018, the Company had 24 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. Six of these loans totaling $3.3 million were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at September 30, 2018 was $9.4 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 Company 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 Company’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or “loss”. An impairment analysis is performed on the B loan and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is established.


	March 31, 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 does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

A further breakout of nonaccrual loans, excluding PCI loans, at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 is below (dollars in thousands):


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	1,530	$	1,962
Residential 1‑4 family					$	1,133	$	1,257
Commercial		2,243		1,498		1,299		2,123
Construction and land development		4,610		4,277		4,101		4,571
Agriculture		—		68
Multifamily						2,552		—
Total real estate loans		8,383		7,805		9,085		7,951
Commercial loans		506		1,214		1,899		1,549
Consumer installment loans		5		7		6		—
Total loans	$	8,894	$	9,026	$	10,990	$	9,500

At ~~September 30, 2018,~~March 31, 2019, the Company had ~~seven~~four construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed and are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at ~~September 30, 2018~~March 31, 2019 was ~~$4.6~~$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 ~~seven~~four relationships was ~~$507,000~~$685,000 at ~~September 30, 2018,~~March 31, 2019, or ~~11.0%~~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 ~~ordered~~frequently obtains appraisals prepared by external professional appraisers for ~~all~~classified loans ~~with balances in excess of~~greater than $250,000 ~~unless there existed an~~when the most recent appraisal ~~that was not older~~is greater than 18 months ~~and/or~~old 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 ~~310-30~~310‑30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which ~~include~~includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as ~~impairment~~impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool. The Company charged $63,000 to the allowance for loan losses during the third quarter of 2018 related to a post-acquisition advance on an acquired line of credit which is not reflected in the expected cash flow estimate.

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 Bank’s ratio of total risk-based capital was ~~13.4%~~13.5% at ~~September 30, 2018~~March 31, 2019 compared with ~~12.5%~~13.3% at December 31, ~~2017.~~2018. The tier 1 risk-based capital ratio was ~~12.6%~~12.7% at ~~September 30, 2018~~March 31, 2019 and ~~11.7%~~12.6% at December 31, ~~2017.~~2018. The Bank’s tier 1 leverage ratio was ~~10.0%~~10.3% at ~~September 30, 2018~~March 31, 2019 and ~~9.6%~~10.2% at December 31, ~~2017.~~2018. All capital ratios exceed regulatory

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minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was ~~12.6%~~12.7% at ~~September 30, 2018~~March 31, 2019 and ~~11.7%~~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 Bank does not maintain the full amount of the buffer. ~~The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019.~~ At ~~September 30, 2018,~~March 31, 2019, the Bank had a capital conservation buffer of 5.5%~~, well above the 2018 required buffer of 1.875%~~.

Liquidity

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

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 was as follows (dollars in thousands):

September 30, 2018 December 31, 2017
Cash and due from banks $ 12,918 $ 14,642
Interest bearing bank deposits 11,177 7,316
Federal funds sold 240 —
Available for sale securities, at fair value, unpledged 167,317 168,221
Total liquid assets $ 191,652 $ 190,179

Deposits and other liabilities $ 1,218,617 $ 1,212,187
Ratio of liquid assets to deposits and other liabilities 15.73 % 15.69 %


	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	%

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 the ~~aggregate.~~aggregate at March 31, 2019.

Off-Balance Sheet Arrangements and Contractual Obligations

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


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Commitments with off-balance sheet risk:
Commitments to extend credit	$	183,902	$	163,686	$	218,290	$	204,831
Standby letters of credit		5,235		6,532		4,828		5,280
Total commitments with off-balance sheet risks	$	189,137	$	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.

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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.

The fair value of the Company’s cash flow hedge was an unrealized gain of ~~$353,000~~$159,000 and ~~$177,000~~$253,000 at ~~September 30, 2018~~March 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.

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

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

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The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at ~~September 30, 2018~~March 31, 2019 (dollars in thousands):


	September 30, 2018						March 31, 2019
	%			$			%	$
Change in Yield curve
+400 bp		5.5			2,508		4.6	2,193
+300 bp		4.4			1,997		3.7	1,782
+200 bp		3.2			1,442		2.8	1,350
+100 bp		1.7			790		1.5	704
most likely		—			—		—	—
-100 bp		(1.6	)		(710	)
-200 bp		(3.8	)		(1,731	)
-300 bp		(6.5	)		(2,948	)
-400 bp		(6.7	)		(3,053	)
‑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 ~~September 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 ~~5.5%~~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 ~~6.7%~~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.

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.

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Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

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

~~Exhibit No.~~	Description
31.1		Rule ~~13a-14(a)~~13a‑14(a)/~~15d-14(a)~~15d‑14(a) Certification for Chief Executive Officer*
31.2		Rule ~~13a-14(a)~~13a‑14(a)/~~15d-14(a)~~15d‑14(a) Certification for Chief Financial Officer*
32.1		Section 1350 Certifications*
101		Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form ~~10-Q~~10‑Q for the period ended ~~September 30, 2018~~March 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.

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SIGNATURES~~SIGNATURES~~

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

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)

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

Date: ~~November 8, 2018~~May 9, 2019

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

Date: ~~November 8, 2018~~May 9, 2019