UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 20182019

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

COMMISSION FILE NUMBER: 0-22955

 

BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

VIRGINIA

54-1838100

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

1801 BAYBERRY COURT, SUITE 101

RICHMOND, VIRGINIA 23226

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 325-3775

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

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      no

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      yes      no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

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 of the Exchange Act).      yes      no

1


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 13,236,36013,332,484 shares of common stock on August 7, 2018.2, 2019.

 

 


FORM 10-Q

For the interim period ending June 30, 20182019

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

34

 

 

 

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 20182019 (UNAUDITED) AND DECEMBER 31, 20172018

 

34

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20182019 AND 20172018 (UNAUDITED)

 

45

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20182019 AND 20172018 (UNAUDITED)

 

56

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED)

 

67

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 20182019 AND 20172018 (UNAUDITED)

 

79

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

810

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

2829

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

3840

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

3941

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

3941

 

 

 

ITEM 1A. RISK FACTORS

 

3941

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

3941

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

3941

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

3941

 

 

 

ITEM 5. OTHER INFORMATION

 

4041

 

 

 

ITEM 6. EXHIBITS

 

4142

 


PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

June 30,

2018

 

 

December 31,

2017 (1)

 

 

(unaudited)

 

 

 

 

 

(Dollars in thousands, except share data)

 

(unaudited)

 

 

 

 

 

 

June 30,

2019

 

 

December 31,

2018 (1)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,319

 

 

$

9,396

 

 

$

8,139

 

 

$

7,685

 

Interest-bearing deposits

 

 

28,263

 

 

 

41,971

 

Interest-earning deposits

 

 

15,869

 

 

 

18,981

 

Federal funds sold

 

 

596

 

 

 

625

 

Certificates of deposit

 

 

3,224

 

 

 

3,224

 

 

 

3,498

 

 

 

3,746

 

Federal funds sold

 

 

1,944

 

 

 

6,961

 

Available-for-sale securities, at fair value

 

 

74,322

 

 

 

77,153

 

 

 

81,169

 

 

 

82,232

 

Restricted securities

 

 

6,190

 

 

 

5,787

 

 

 

6,769

 

 

 

7,600

 

Loans receivable, net of allowance for loan losses of $7,113 and $7,770,

respectively

 

 

794,443

 

 

 

758,726

 

Loans receivable, net of allowance for loan losses of $7,479 and

$7,902, respectively

 

 

909,913

 

 

 

894,191

 

Loans held for sale

 

 

669

 

 

 

1,651

 

 

 

593

 

 

 

368

 

Premises and equipment, net

 

 

18,079

 

 

 

17,463

 

 

 

21,001

 

 

 

18,169

 

Accrued interest receivable

 

 

2,954

 

 

 

3,194

 

 

 

3,191

 

 

 

3,172

 

Other real estate owned, net

 

 

3,501

 

 

 

4,284

 

 

 

3,168

 

 

 

3,597

 

Bank owned life insurance

 

 

19,024

 

 

 

18,773

 

 

 

19,511

 

 

 

19,270

 

Goodwill

 

 

10,374

 

 

 

10,374

 

 

 

10,374

 

 

 

10,374

 

Mortgage servicing rights

 

 

977

 

 

 

999

 

 

 

916

 

 

 

977

 

Core deposit intangible

 

 

2,576

 

 

 

2,991

 

 

 

1,840

 

 

 

2,193

 

Deferred tax asset, net

 

 

1,128

 

 

 

1,510

 

Other assets

 

 

8,357

 

 

 

7,609

 

 

 

6,585

 

 

 

5,927

 

Total assets

 

$

983,216

 

 

$

970,556

 

 

$

1,094,260

 

 

$

1,080,617

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

108,943

 

 

$

103,037

 

Noninterest-bearing demand deposits

 

$

116,229

 

 

$

114,122

 

Savings and interest-bearing demand deposits

 

 

296,206

 

 

 

299,820

 

 

 

374,175

 

 

 

359,400

 

Time deposits

 

 

369,917

 

 

 

358,989

 

 

 

385,218

 

 

 

368,670

 

Total deposits

 

 

775,066

 

 

 

761,846

 

 

 

875,622

 

 

 

842,192

 

Securities sold under repurchase agreements

 

 

7,008

 

 

 

9,498

 

 

 

6,983

 

 

 

6,089

 

Federal Home Loan Bank advances

 

 

70,000

 

 

 

70,000

 

 

 

70,000

 

 

 

100,000

 

Subordinated notes, net of issuance costs

 

 

6,885

 

 

 

6,877

 

 

 

6,902

 

 

 

6,893

 

Other liabilities

 

 

8,533

 

 

 

7,781

 

 

 

12,136

 

 

 

7,967

 

Total liabilities

 

 

867,492

 

 

 

856,002

 

 

 

971,643

 

 

 

963,141

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock ($5 par value; authorized - 30,000,000 shares; outstanding -

13,226,096 and 13,203,605 shares, respectively) (2)

 

 

66,130

 

 

 

66,018

 

Common stock ($5 par value; authorized - 30,000,000 shares;

outstanding - 13,332,484 and 13,201,682 shares, respectively) (2)

 

 

66,662

 

 

 

66,008

 

Additional paid-in capital

 

 

37,207

 

 

 

37,142

 

 

 

36,699

 

 

 

36,972

 

Unearned employee stock ownership plan shares

 

 

(1,047

)

 

 

(1,129

)

 

 

(1,668

)

 

 

(1,734

)

Retained earnings

 

 

15,749

 

 

 

13,679

 

 

 

20,817

 

 

 

17,557

 

Accumulated other comprehensive loss, net

 

 

(2,315

)

 

 

(1,156

)

Accumulated other comprehensive income (loss), net

 

 

107

 

 

 

(1,327

)

Total shareholders’ equity

 

 

115,724

 

 

 

114,554

 

 

 

122,617

 

 

 

117,476

 

Total liabilities and shareholders’ equity

 

$

983,216

 

 

$

970,556

 

 

$

1,094,260

 

 

$

1,080,617

 

 

(1)

Derived from audited December 31, 20172018 Consolidated Financial Statements.

(2)

Preferred stock is authorized; however, none was outstanding as of June 30, 20182019 and December 31, 2017.2018.

See Notes to Consolidated Financial Statements.

34


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(Dollars in thousands, except per share data)

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

9,745

 

 

$

8,326

 

 

$

19,729

 

 

$

12,714

 

 

$

11,458

 

 

$

9,745

 

 

$

22,919

 

 

$

19,729

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

497

 

 

 

348

 

 

 

894

 

 

 

617

 

 

 

577

 

 

 

497

 

 

 

1,172

 

 

 

894

 

Tax-exempt

 

 

117

 

 

 

114

 

 

 

237

 

 

 

228

 

 

 

97

 

 

 

117

 

 

 

214

 

 

 

237

 

Federal funds sold

 

 

52

 

 

 

33

 

 

 

126

 

 

 

34

 

 

 

18

 

 

 

52

 

 

 

25

 

 

 

126

 

Interest-bearing deposit accounts

 

 

80

 

 

 

53

 

 

 

178

 

 

 

60

 

Interest-earning deposit accounts

 

 

152

 

 

 

80

 

 

 

288

 

 

 

178

 

Certificates of deposit

 

 

17

 

 

 

18

 

 

 

36

 

 

 

37

 

 

 

19

 

 

 

17

 

 

 

39

 

 

 

36

 

Total interest income

 

 

10,508

 

 

 

8,892

 

 

 

21,200

 

 

 

13,690

 

 

 

12,321

 

 

 

10,508

 

 

 

24,657

 

 

 

21,200

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,796

 

 

 

1,077

 

 

 

3,400

 

 

 

1,707

 

 

 

3,088

 

 

 

1,796

 

 

 

5,896

 

 

 

3,400

 

Federal funds purchased

 

 

 

 

 

 

 

 

 

 

 

10

 

Securities sold under repurchase agreements

 

 

4

 

 

 

4

 

 

 

7

 

 

 

7

 

 

 

4

 

 

 

4

 

 

 

7

 

 

 

7

 

Subordinated notes

 

 

128

 

 

 

119

 

 

 

256

 

 

 

236

 

 

 

138

 

 

 

128

 

 

 

275

 

 

 

256

 

Federal Home Loan Bank advances

 

 

386

 

 

 

248

 

 

 

699

 

 

 

402

 

 

 

614

 

 

 

386

 

 

 

1,319

 

 

 

699

 

Total interest expense

 

 

2,314

 

 

 

1,448

 

 

 

4,362

 

 

 

2,362

 

 

 

3,844

 

 

 

2,314

 

 

 

7,497

 

 

 

4,362

 

Net interest income

 

 

8,194

 

 

 

7,444

 

 

 

16,838

 

 

 

11,328

 

 

 

8,477

 

 

 

8,194

 

 

 

17,160

 

 

 

16,838

 

Provision for (recovery of) loan losses

 

 

(348

)

 

 

568

 

 

 

(28

)

 

 

758

 

 

 

62

 

 

 

(348

)

 

 

376

 

 

 

(28

)

Net interest income after provision for loan losses

 

 

8,542

 

 

 

6,876

 

 

 

16,866

 

 

 

10,570

 

 

 

8,415

 

 

 

8,542

 

 

 

16,784

 

 

 

16,866

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

 

198

 

 

 

229

 

 

 

445

 

 

 

474

 

 

 

206

 

 

 

198

 

 

 

420

 

 

 

445

 

Service charges and fees on deposit accounts

 

 

152

 

 

 

246

 

 

 

287

 

 

 

458

 

 

 

246

 

 

 

152

 

 

 

484

 

 

 

287

 

Non-deposit product income

 

 

282

 

 

 

115

 

 

 

414

 

 

 

195

 

Wealth management

 

 

262

 

 

 

282

 

 

 

469

 

 

 

414

 

Interchange fees, net

 

 

124

 

 

 

129

 

 

 

116

 

 

 

204

 

 

 

121

 

 

 

124

 

 

 

222

 

 

 

116

 

Other service charges and fees

 

 

30

 

 

 

45

 

 

 

61

 

 

 

77

 

 

 

27

 

 

 

30

 

 

 

56

 

 

 

61

 

Secondary market lending income

 

 

243

 

 

 

86

 

 

 

376

 

 

 

201

 

Secondary market sales and servicing

 

 

267

 

 

 

243

 

 

 

339

 

 

 

376

 

Increase in cash surrender value of bank owned life insurance

 

 

124

 

 

 

133

 

 

 

251

 

 

 

208

 

 

 

121

 

 

 

124

 

 

 

240

 

 

 

251

 

Net gains on sale of available-for-sale securities

 

 

 

 

 

7

 

 

 

 

 

 

2

 

Net losses on disposition of other assets

 

 

 

 

 

 

 

 

(69

)

 

 

 

Net losses on sale of available-for-sale securities

 

 

(2

)

 

 

 

 

 

(2

)

 

 

 

Net loss on disposition of other assets

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(69

)

Gain (loss) on rabbi trust assets

 

 

40

 

 

 

(25

)

 

 

130

 

 

 

27

 

Gain on curtailment of post-retirement benefit plan

 

 

 

 

 

 

 

 

352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

352

 

Other income

 

 

10

 

 

 

91

 

 

 

101

 

 

 

152

 

Total non-interest income

 

 

1,163

 

 

 

1,081

 

 

 

2,334

 

 

 

1,971

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

8

 

 

 

35

 

 

 

28

 

 

 

74

 

Total noninterest income

 

 

1,295

 

 

 

1,163

 

 

 

2,385

 

 

 

2,334

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,273

 

 

 

3,321

 

 

 

8,379

 

 

 

6,145

 

 

 

3,892

 

 

 

4,273

 

 

 

7,893

 

 

 

8,379

 

Occupancy

 

 

882

 

 

 

693

 

 

 

1,677

 

 

 

1,132

 

 

 

837

 

 

 

874

 

 

 

1,705

 

 

 

1,659

 

Data processing

 

 

837

 

 

 

394

 

 

 

1,385

 

 

 

598

 

 

 

609

 

 

 

834

 

 

 

1,197

 

 

 

1,306

 

Bank franchise tax

 

 

177

 

 

 

142

 

 

 

353

 

 

 

218

 

 

 

230

 

 

 

177

 

 

 

446

 

 

 

353

 

Telecommunications

 

 

131

 

 

 

76

 

 

 

237

 

 

 

104

 

Telecommunications and other technology

 

 

262

 

 

 

166

 

 

 

469

 

 

 

362

 

FDIC assessments

 

 

187

 

 

 

111

 

 

 

370

 

 

 

196

 

 

 

162

 

 

 

187

 

 

 

378

 

 

 

370

 

Foreclosed property

 

 

53

 

 

 

59

 

 

 

65

 

 

 

69

 

 

 

19

 

 

 

53

 

 

 

62

 

 

 

65

 

Consulting

 

 

346

 

 

 

97

 

 

 

729

 

 

 

151

 

 

 

147

 

 

 

341

 

 

 

262

 

 

 

723

 

Advertising and marketing

 

 

153

 

 

 

54

 

 

 

221

 

 

 

127

 

 

 

109

 

 

 

153

 

 

 

176

 

 

 

221

 

Directors’ fees

 

 

68

 

 

 

209

 

 

 

236

 

 

 

331

 

 

 

213

 

 

 

68

 

 

 

377

 

 

 

236

 

Audit and accounting fees

 

 

240

 

 

 

217

 

 

 

603

 

 

 

245

 

Audit and accounting

 

 

189

 

 

 

240

 

 

 

393

 

 

 

603

 

Legal

 

 

119

 

 

 

13

 

 

 

249

 

 

 

95

 

 

 

27

 

 

 

119

 

 

 

110

 

 

 

249

 

Merger related

 

 

 

 

 

685

 

 

 

363

 

 

 

985

 

Intangible amortization

 

 

203

 

 

 

234

 

 

 

414

 

 

 

234

 

Net other real estate owned (gains) losses

 

 

84

 

 

 

(3

)

 

 

(57

)

 

 

93

 

Merger-related

 

 

 

 

 

 

 

 

 

 

 

363

 

Core deposit intangible amortization

 

 

173

 

 

 

203

 

 

 

353

 

 

 

414

 

Net other real estate owned loss (gains)

 

 

72

 

 

 

84

 

 

 

66

 

 

 

(57

)

Other

 

 

809

 

 

 

844

 

 

 

1,459

 

 

 

1,305

 

 

 

651

 

 

 

790

 

 

 

1,335

 

 

 

1,437

 

Total non-interest expense

 

 

8,562

 

 

 

7,146

 

 

 

16,683

 

 

 

12,028

 

Total noninterest expense

 

 

7,592

 

 

 

8,562

 

 

 

15,222

 

 

 

16,683

 

Income before income taxes

 

 

1,143

 

 

 

811

 

 

 

2,517

 

 

 

513

 

 

 

2,118

 

 

 

1,143

 

 

 

3,947

 

 

 

2,517

 

Income tax expense

 

 

197

 

 

 

254

 

 

 

447

 

 

 

133

 

 

 

395

 

 

 

197

 

 

 

732

 

 

 

447

 

Net income

 

$

946

 

 

$

557

 

 

$

2,070

 

 

$

380

 

 

$

1,723

 

 

$

946

 

 

$

3,215

 

 

$

2,070

 

Basic and diluted earnings per share

 

$

0.07

 

 

$

0.06

 

 

$

0.16

 

 

$

0.05

 

 

$

0.13

 

 

$

0.07

 

 

$

0.25

 

 

$

0.16

 

 

See Notes to Consolidated Financial Statements.


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Net income

 

$

946

 

 

$

557

 

 

$

2,070

 

 

$

380

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (loss) gain on available-for-sale securities arising during the period

 

 

(272

)

 

 

445

 

 

 

(1,467

)

 

 

485

 

Deferred tax benefit (expense)

 

 

57

 

 

 

(150

)

 

 

308

 

 

 

(164

)

Reclassification of net available-for-sale securities gains recognized in net income

 

 

 

 

 

(7

)

 

 

 

 

 

(2

)

Deferred tax benefit

 

 

 

 

 

2

 

 

 

 

 

 

1

 

Total other comprehensive (loss) income

 

 

(215

)

 

 

290

 

 

 

(1,159

)

 

 

320

 

Comprehensive income

 

$

731

 

 

$

847

 

 

$

911

 

 

$

700

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Net income

 

$

1,723

 

 

$

946

 

 

$

3,215

 

 

$

2,070

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on available-for-sale securities arising during the period

 

 

793

 

 

 

(272

)

 

 

1,814

 

 

 

(1,467

)

Deferred tax (expense) benefit

 

 

(167

)

 

 

57

 

 

 

(382

)

 

 

308

 

Reclassification of net available-for-sale securities losses recognized in net income

 

 

2

 

 

 

 

 

 

2

 

 

 

 

Total other comprehensive income (loss)

 

 

628

 

 

 

(215

)

 

 

1,434

 

 

 

(1,159

)

Comprehensive income

 

$

2,351

 

 

$

731

 

 

$

4,649

 

 

$

911

 

 

See Notes to Consolidated Financial Statements.


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,203,605

 

 

$

66,018

 

 

$

37,142

 

 

$

(1,129

)

 

$

13,679

 

 

$

(1,156

)

 

$

114,554

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,070

 

 

 

 

 

 

2,070

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,159

)

 

 

(1,159

)

Stock options exercised

 

 

22,491

 

 

 

112

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

131

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

82

 

Share-based compensation expense

 

 

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Balance at end of period

 

 

13,226,096

 

 

$

66,130

 

 

$

37,207

 

 

$

(1,047

)

 

$

15,749

 

 

$

(2,315

)

 

$

115,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Income (Loss), net

 

 

Equity

 

Balances at December 31, 2018

 

 

13,201,682

 

 

$

66,008

 

 

$

36,972

 

 

$

(1,734

)

 

$

17,557

 

 

$

(1,327

)

 

$

117,476

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,215

 

 

 

 

 

 

3,215

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,434

 

 

 

1,434

 

Stock options exercised, net

 

 

5,173

 

 

 

26

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

9

 

Director stock grant

 

 

18,396

 

 

 

92

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

148

 

Restricted stock awards

 

 

107,233

 

 

 

536

 

 

 

(536

)

 

 

 

 

 

 

 

 

 

 

 

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

66

 

Share-based compensation expense

 

 

 

 

 

 

 

 

224

 

 

 

 

 

 

 

 

 

 

 

 

224

 

Cumulative effect adjustment of adoption of accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Balances at June 30, 2019

 

 

13,332,484

 

 

$

66,662

 

 

$

36,699

 

 

$

(1,668

)

 

$

20,817

 

 

$

107

 

 

$

122,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Balances at December 31, 2017

 

 

13,203,605

 

 

$

66,018

 

 

$

37,142

 

 

$

(1,129

)

 

$

13,679

 

 

$

(1,156

)

 

$

114,554

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,070

 

 

 

 

 

 

2,070

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,159

)

 

 

(1,159

)

Stock options exercised, net

 

 

22,491

 

 

 

112

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

131

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

82

 

Share-based compensation expense

 

 

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Balances at June 30, 2018

 

 

13,226,096

 

 

$

66,130

 

 

$

37,207

 

 

$

(1,047

)

 

$

15,749

 

 

$

(2,315

)

 

$

115,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Income (Loss), net

 

 

Equity

 

Balances at April 1, 2019

 

 

13,313,537

 

 

$

66,568

 

 

$

36,493

 

 

$

(1,697

)

 

$

19,094

 

 

$

(521

)

 

$

119,937

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,723

 

 

 

 

 

 

1,723

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

628

 

 

 

628

 

Director stock grant

 

 

17,634

 

 

 

88

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

142

 

Restricted stock awards

 

 

1,313

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

29

 

Share-based compensation expense

 

 

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

 

 

 

158

 

Balances at June 30, 2019

 

 

13,332,484

 

 

$

66,662

 

 

$

36,699

 

 

$

(1,668

)

 

$

20,817

 

 

$

107

 

 

$

122,617

 

7


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Balances at April 1, 2018

 

 

13,223,096

 

 

$

66,115

 

 

$

37,189

 

 

$

(1,088

)

 

$

14,803

 

 

$

(2,100

)

 

$

114,919

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

946

 

 

 

 

 

 

946

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(215

)

 

 

(215

)

Stock options exercised, net

 

 

3,000

 

 

 

15

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

18

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

41

 

Share-based compensation expense

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

15

 

Balances at June 30, 2018

 

 

13,226,096

 

 

$

66,130

 

 

$

37,207

 

 

$

(1,047

)

 

$

15,749

 

 

$

(2,315

)

 

$

115,724

 

 

See Notes to Consolidated Financial Statements.

 


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

For the Six Months Ended

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2019

 

 

June 30, 2018

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,070

 

 

$

380

 

 

$

3,215

 

 

$

2,070

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

805

 

 

 

639

 

 

 

871

 

 

 

805

 

Net premium accretion and discount amortization of securities

 

 

207

 

 

 

183

 

Amortization of subordinated debt issuance costs

 

 

8

 

 

 

8

 

Net premium amortization on available-for-sale securities

 

 

276

 

 

 

207

 

Amortization of subordinated notes issuance costs

 

 

9

 

 

 

8

 

Amortization of core deposit intangible

 

 

414

 

 

 

234

 

 

 

353

 

 

 

414

 

Accretion of fair value adjustment of time deposits

 

 

(110

)

 

 

(117

)

Accretion of fair value adjustments (discounts) of loans

 

 

1,051

 

 

 

(451

)

Accretion of fair value adjustment on acquired time deposits

 

 

(65

)

 

 

(110

)

Accretion of fair value discounts on acquired loans

 

 

(636

)

 

 

(1,051

)

Provision for (recovery of) loan losses

 

 

(28

)

 

 

758

 

 

 

376

 

 

 

(28

)

Share-based compensation

 

 

46

 

 

 

67

 

Gain on sale of available-for-sale securities

 

 

 

 

 

(2

)

Share-based compensation expense

 

 

224

 

 

 

46

 

Net loss on the sale of available-for-sale securities

 

 

2

 

 

 

 

Increase in other real estate owned valuation allowance

 

 

91

 

 

 

109

 

 

 

61

 

 

 

91

 

Gain on sale of other real estate owned

 

 

(148

)

 

 

(16

)

Loss on disposal of fixed and other assets

 

 

69

 

 

 

 

Net loss (gain) on sale of other real estate owned

 

 

5

 

 

 

(148

)

Net loss on the disposition of fixed and other assets

 

 

1

 

 

 

69

 

Decrease in value of mortgage servicing rights

 

 

22

 

 

 

6

 

 

 

61

 

 

 

22

 

Loan originations for sale

 

 

(13,926

)

 

 

(5,719

)

Loan sales

 

 

15,135

 

 

 

5,788

 

Gain on sold loans

 

 

(227

)

 

 

(51

)

Originations of loans held for sale (HFS)

 

 

(13,982

)

 

 

(13,926

)

Proceeds from HFS loan sales

 

 

14,004

 

 

 

15,135

 

Gain on HFS sold loans

 

 

(247

)

 

 

(227

)

Increase in cash surrender value of bank owned life insurance

 

 

(251

)

 

 

(208

)

 

 

(240

)

 

 

(251

)

Gain on curtailment of post-retirement benefit plan

 

 

(352

)

 

 

 

 

 

 

 

 

(352

)

(Increase) decrease in accrued interest receivable and other assets

 

 

(269

)

 

 

304

 

Increase in other assets and accrued interest receivable

 

 

(4,707

)

 

 

(269

)

Increase in other liabilities

 

 

1,186

 

 

 

297

 

 

 

4,119

 

 

 

1,186

 

Net cash provided by operating activities

 

 

5,793

 

 

 

2,209

 

 

 

3,700

 

 

 

3,691

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities and principal pay downs of available-for-sale securities

 

 

1,808

 

 

 

2,198

 

Proceeds from maturities and principal paydowns of available-for-sale securities

 

 

2,089

 

 

 

1,808

 

Proceeds from sales and calls of available-for-sale securities

 

 

 

 

 

17,662

 

 

 

4,510

 

 

 

 

Purchases of available-for-sale securities

 

 

(4,000

)

 

 

(650

)

Sales (purchases) of restricted securities, net

 

 

831

 

 

 

(403

)

Maturities of certificates of deposit

 

 

 

 

 

992

 

 

 

248

 

 

 

 

Purchases of available-for-sale securities and certificates of deposit

 

 

(650

)

 

 

(743

)

Purchases of restricted securities, net

 

 

(403

)

 

 

(470

)

Increase in federal funds sold

 

 

5,017

 

 

 

 

Decrease in federal funds sold

 

 

29

 

 

 

5,017

 

Net increase in loans

 

 

(38,901

)

 

 

(52,157

)

 

 

(15,613

)

 

 

(36,799

)

Principal payments on loans held for sale

 

 

 

 

 

279

 

Cash acquired in the merger with Virginia BanCorp

 

 

 

 

 

14,698

 

Proceeds from sale of other real estate owned

 

 

3,001

 

 

 

412

 

 

 

515

 

 

 

3,001

 

Proceeds from sale of equipment

 

 

 

 

 

6

 

Purchases of premises and equipment

 

 

(1,421

)

 

 

(836

)

Net decrease (increase) of premises and equipment

 

 

705

 

 

 

(1,421

)

Net cash used in investing activities

 

 

(31,549

)

 

 

(17,959

)

 

 

(10,686

)

 

 

(29,447

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in demand, savings, and other interest-bearing deposits

 

 

2,292

 

 

 

(20,071

)

Net increase in demand, savings, and other interest-bearing demand deposits

 

 

16,882

 

 

 

2,292

 

Net increase in time deposits

 

 

11,038

 

 

 

59,516

 

 

 

16,613

 

 

 

11,038

 

Stock options exercised

 

 

131

 

 

 

138

 

Net decrease in securities sold under repurchase agreements

 

 

(2,490

)

 

 

(7,524

)

Increase in Federal Home Loan Bank advances

 

 

 

 

 

10,000

 

Stock options exercised, net

 

 

9

 

 

 

131

 

Net increase (decrease) in securities sold under repurchase agreements and other borrowings

 

 

824

 

 

 

(2,490

)

Decrease in Federal Home Loan Bank advances

 

 

(30,000

)

 

 

 

Net cash provided by financing activities

 

 

10,971

 

 

 

42,059

 

 

 

4,328

 

 

 

10,971

 

Net (decrease) increase in cash and due from banks

 

 

(14,785

)

 

 

26,309

 

Net decrease in cash and due from banks

 

 

(2,658

)

 

 

(14,785

)

Cash and cash equivalents (including interest-earning deposits) at beginning of period

 

 

51,367

 

 

 

14,702

 

 

 

26,666

 

 

 

51,367

 

Cash and cash equivalents (including interest-earning deposits) at end of period

 

$

36,582

 

 

$

41,011

 

 

$

24,008

 

 

$

36,582

 

Supplemental Schedule of Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

4,334

 

 

$

2,181

 

 

$

7,473

 

 

$

4,334

 

Income taxes

 

 

620

 

 

 

550

 

 

 

 

 

 

620

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

 

(1,467

)

 

 

485

 

Unrealized gain (loss) on available-for-sale securities

 

 

1,814

 

 

 

(1,467

)

Changes in deferred taxes resulting from other comprehensive income transactions

 

 

(382

)

 

 

308

 

Loans transferred to other real estate owned

 

 

2,161

 

 

 

259

 

 

 

152

 

 

 

2,161

 

Loans originated to facilitate sale of other real estate owned

 

 

 

 

 

190

 

Changes in deferred taxes resulting from other comprehensive income transactions

 

 

(308

)

 

 

164

 

Dividends declared

 

 

 

 

 

377

 

Cumulative effect adjustment of adoption of accounting principle

 

 

(45

)

 

 

 

Employee stock ownership plan transactions

 

 

(66

)

 

 

(82

)

Director stock grant

 

 

148

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 



9


Notes to Consolidated FinancialFinancial Statements (Unaudited)

Note 1: Basis of Presentation

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank formerly known as Bank of Lancaster (the “Bank” or “VCB”), for VCB Financial Group, Inc., formerly known as Bay Trust Company (“VCBFG” (the “Financial Group” or “VCBFG”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of Bay Banks of Virginia, Inc.,the Company, the Bank, VCBFG,the Financial Group, and Steptoes Holdings.

On April 1, 2017, the Company completed the merger with Virginia BanCorp Inc., which is further discussed in Note 3, and as such, the consolidated financial statements presented herein reflect the combined operations of the business combination since the effective time of the merger.

In August 2017, the Company completed a private placement of 3,783,784 shares of common stock at an offering price of $9.25 per share to certain existing shareholders, institutional investors, and other accredited investors. Proceeds from the offering, net of offering expenses, were $32.9 million.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Note 2: Amendments to the Accounting Standards Codification

In March 2017,June 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. This ASU was effective for annual periods and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

8


In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. This ASU is effective for fiscal years beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies accounting for goodwill impairments by eliminating step two (the implied fair value to carrying value of goodwill) from the existing goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the effect of the standard and does not expect it to have a material effect on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic(Accounting Standards Codification (“ASC”) 326), which is new guidance for the accounting for credit losses on instruments within its scope. ItThis ASU introduces a new model for current expected credit losses (“CECL”), which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This will includeexposures, including loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance, and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In addition, this ASU replacesASC will replace the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. TheThis ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. The Company has a CECL cross-functional working group that is implementing the standard supported by its third-party vendor. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. On July 17, 2019, the FASB voted to delay the effective date of this ASU for smaller reporting companies and non-SEC registrants to interim and annual periods beginning after December 15, 2022. The FASB directed its staff to draft a proposed ASU outlining this delay for public comment. The Company meets the definition of a smaller reporting company and is evaluatingmonitoring the effect that this ASU will have on its consolidated financial statements and has formed an implementation committee, which is studying the standard, evaluating third parties’ models to support the requirementsimpact of the standard and to assist in implementation.proposed delay.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic(ASC 842)(“ASU 2016-02”). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. This ASU iswas effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company hasis a lessee in several lease agreements, such as for office space, which are currentlywere considered operating leases and not recognized on its consolidated balance sheet. Thesheet for the year ended December 31, 2018. On January 1, 2019, the Company expectsadopted the requirements of ASU 2016-02, and as part of the transition to the new guidancestandard, the Company measured and recognized leases that existed on January 1, 2019 using a modified retrospective approach. The adoption of ASU 2016-02 resulted in the recognition of operating Right-of-Use (“ROU”) assets and operating lease liabilities of $3.5 million and $3.8 million, respectively, primarily related to require these lease agreements to be recognized on its balance sheet as a right-to-use asset with a corresponding liability.real estate leases for branches and office space and information technology related equipment. The Company is currently taking inventory of its lease agreements and accumulating the data needed to implement the new standard. However, the Company does not expect the guidance to have a materialany finance leases as stipulated in ASC 842. A cumulative effect on its financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), which requires equity investments, other than those accounted for using the equity method, to be measured at fair value through earnings. There will no longer be an available-for-sale classification measured (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. The cost method is also eliminated for equity instruments without a readily determinable fair value. For these investments, companies can elect to record the investment at cost, less impairment, plus or minus subsequent adjustments for observable price changes. This election only applies to equity investments that do not qualify for the net asset value practical expedient. Public companies will be required to use the exit price when measuring the fair valueadjustment of financial instruments measured at amortized cost for disclosure purposes. In addition, this ASU requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The classification and measurement guidance is effective for periods beginning after December 15, 2017. The Company’s primary available-for sale investments are debt securities and are therefore not included in the scope of this ASU. However, the Company is subject to certain disclosure requirements of the standard and has engaged a third party to assist with the measurement of exit prices of its financial instruments, including its loans receivables, deposits, and borrowings. The$45 thousand was recorded upon adoption of this ASU did not have a material effect on the Company’s financial statements, other than the fair value disclosures in Note 11.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the

9


satisfaction of performance obligations. Subsequent to the issuance of this ASU, the FASB issued targeted updates to clarify specific implementation issues including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoptions, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect on initially applying the standard being recognized at the date of initial application. The effective date for this ASU was for annual reporting periods beginning after December 15, 2017. The Company’s primary source of revenue is interest income from loans and investments and loan fees. As these items are outside the scope of the standard, this income was not affected by this ASU. The Company reviewed other sources of income including fiduciary fees, secondary market lending fees, and other deposit account fees against the requirements of the standard and concluded no changes in the accounting methods were necessary. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs should be presented net of related revenues); this classification was made to both revenue and expense for the quarters and year to date periods ended June 30, 2018 and 2017.

Note 3: Business Combination

On April 1, 2017, the Company and Virginia BanCorp Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank, completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp (the “Merger”). The Company is the surviving corporation in the Merger, and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $42.2 million at the time of closing. As of the completion of the Merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company, and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company. After the Merger of Virginia BanCorp with and into the Company, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, a wholly owned subsidiary of the Company, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank.

The Merger was accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. Under this method, the assets and liabilities of Virginia BanCorp were recorded at their respective fair values as of April 1, 2017. Determining the fair value of assets and liabilities, particularly for the loan portfolio, is a complex process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. As a result, the Company recognized goodwill of $7.6 million in connection with the Merger, none of2016-02, which is deductible for income tax purposes.

10


The following table details the total consideration paid by the Company on April 1, 2017, in connection with the acquisition of Virginia BanCorp, the fair value of the assets acquired and liabilities assumed, and the resulting goodwill.

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

As Recorded

 

 

Adjustments

 

 

As Recorded

 

 

 

by Virginia

BanCorp

 

 

and

Reclassifications

 

 

by the

Company

 

Consideration paid:

 

 

 

 

 

 

 

 

 

 

 

 

Bay Banks of Virginia, Inc. common stock

 

 

 

 

 

 

 

 

 

$

42,247

 

Identifiable assets acquired:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

2,356

 

 

$

 

 

$

2,356

 

Interest-bearing deposits

 

 

12,342

 

 

 

 

 

 

12,342

 

Securities available-for-sale

 

 

22,088

 

 

 

 

 

 

22,088

 

Restricted securities

 

 

1,543

 

 

 

 

 

 

1,543

 

Loans receivable

 

 

272,479

 

 

 

(62,068

)

 

 

210,411

 

Loans held for sale

 

 

 

 

 

55,648

 

 

 

55,648

 

Deferred income taxes

 

 

1,325

 

 

 

255

 

 

 

1,580

 

Premises and equipment

 

 

3,333

 

 

 

2,703

 

 

 

6,036

 

Accrued interest receivable

 

 

1,253

 

 

 

(24

)

 

 

1,229

 

Other real estate owned

 

 

3,113

 

 

 

 

 

 

3,113

 

Core deposit intangible

 

 

 

 

 

3,670

 

 

 

3,670

 

Bank owned life insurance

 

 

8,430

 

 

 

 

 

 

8,430

 

Mortgage servicing rights

 

 

324

 

 

 

 

 

 

324

 

Other assets

 

 

365

 

 

 

 

 

 

365

 

Total identified assets acquired

 

 

328,951

 

 

 

184

 

 

 

329,135

 

Identifiable liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

21,119

 

 

 

 

 

 

21,119

 

Savings and interest-bearing demand deposits

 

 

124,640

 

 

 

 

 

 

124,640

 

Time deposits

 

 

121,437

 

 

 

733

 

 

 

122,170

 

Federal Home Loan Bank advances

 

 

25,000

 

 

 

 

 

 

25,000

 

Other liabilities

 

 

1,525

 

 

 

 

 

 

1,525

 

Total identifiable liabilities assumed

 

 

293,721

 

 

 

733

 

 

 

294,454

 

Total identifiable assets assumed

 

$

35,230

 

 

$

(549

)

 

$

34,681

 

Goodwill resulting from acquisition

 

 

 

 

 

 

 

 

 

$

7,566

 

Pro Forma Financial Information

The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2017. The unaudited combined pro forma revenue and net income combines the historical results of Virginia BanCorp with the Company’s consolidated statements of operations for the period noted, and while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2017. Merger-related expenses of $985 thousand were includedreflected in the Company’s actual consolidated statementsstatement of operationsshareholders’ equity. Refer to Note 7 for the six months ended June 30, 2017, but were excluded from the unaudited pro formaadditional information below. Operational cost savings and other efficiencies expected to be achieved by the Company due to the Merger are also not reflected in the unaudited pro forma amounts.disclosures regarding ASU 2016-02.

 

 

For the Six Months Ended June 30, 2017

 

Net interest income

 

$

11,845

 

Net income

 

 

1,464

 

11


Impact of Certain Acquisition Accounting Adjustments

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from Virginia BanCorp had the following impact on the consolidated statements of operations for the periods presented below.

 

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

Loans (1)

 

$

547

 

 

$

1,051

 

Core deposit intangible (2)

 

 

(203

)

 

 

(414

)

Time deposits (3)

 

 

42

 

 

 

110

 

Depreciation (4)

 

 

(10

)

 

 

(20

)

Net impact to income before income taxes

 

$

376

 

 

$

727

 

(1)

Loan discount accretion is included in loan interest income, including fees, in the consolidated statements of operations.

(2)

CDI amortization is included in other expense in noninterest expense in the consolidated statements of operations.

(3)

Time deposit premium amortization is included in deposits in interest expense in the consolidated statements of operations.

(4)

Depreciation on the fair value adjustment of fixed assets is included in occupancy expense in noninterest expense in the consolidated statements of operations.

Note 4:3: Securities

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

June 30, 2018

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

June 30, 2019

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

48,032

 

 

$

2

 

 

$

(1,707

)

 

$

46,327

 

 

$

51,941

 

 

$

205

 

 

$

(279

)

 

$

51,867

 

State and municipal obligations

 

 

21,281

 

 

 

32

 

 

 

(422

)

 

 

20,891

 

 

 

16,810

 

 

 

281

 

 

 

(37

)

 

 

17,054

 

Corporate bonds

 

 

7,096

 

 

 

10

 

 

 

(2

)

 

 

7,104

 

 

 

12,180

 

 

 

68

 

 

 

 

 

 

12,248

 

Total available-for-sale securities

 

$

76,409

 

 

$

44

 

 

$

(2,131

)

 

$

74,322

 

 

$

80,931

 

 

$

554

 

 

$

(316

)

 

$

81,169

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2017

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

December 31, 2018

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

49,964

 

 

$

6

 

 

$

(687

)

 

$

49,283

 

 

$

51,126

 

 

$

35

 

 

$

(1,279

)

 

$

49,882

 

State and municipal obligations

 

 

21,113

 

 

 

195

 

 

 

(155

)

 

 

21,153

 

 

 

20,484

 

 

 

60

 

 

 

(327

)

 

 

20,217

 

Corporate bonds

 

 

6,696

 

 

 

23

 

 

 

(2

)

 

 

6,717

 

 

 

12,194

 

 

 

23

 

 

 

(84

)

 

 

12,133

 

Total available-for-sale securities

 

$

77,773

 

 

$

224

 

 

$

(844

)

 

$

77,153

 

 

$

83,804

 

 

$

118

 

 

$

(1,690

)

 

$

82,232

 

Securities with fair values of $18.5$12.1 million and $19.4$17.5 million were pledged as collateral for securities sold under repurchase agreements as of June 30, 20182019 and December 31, 2017,2018, respectively. As of June 30, 20182019 and December 31, 2017,2018, all of the securities pledged for repurchase agreements were state and municipal obligations. All of the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $7.0 million and $9.5$6.1 million as of June 30, 20182019 and December 31, 2017,2018, respectively, and are included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value changes.

12


Securities in an unrealized loss position atas of June 30, 20182019 and December 31, 2017,2018, by period of the unrealized loss, are shown below. The unrealized loss positions were primarily related to interest rate movements and not the credit quality of the issuers. All agency securities and state and municipal securities are investment grade or better, and their losses are considered temporary. Management does not intend to sell nor expect to be required to sell these securities, and all amortized cost bases are expected to be recovered. Securities with unrealized loss positions at June 30, 2018 included 52 U.S. government agencies, 44 state and municipal obligations, and one corporate bond. Securities with unrealized loss positions at December 31, 2017 included 36 U.S. government agencies, 34 state and municipal obligations, and one corporate bond.

The following tables provide additional information on these securities in an unrealized loss position as of the dates stated.

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

June 30, 2018

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed

   securities

 

$

31,602

 

 

$

(1,046

)

 

$

14,323

 

 

$

(661

)

 

$

45,925

 

 

$

(1,707

)

States and municipal obligations

 

 

10,363

 

 

 

(99

)

 

 

5,403

 

 

 

(323

)

 

 

15,766

 

 

 

(422

)

Corporate bonds

 

 

498

 

 

 

(2

)

 

 

 

 

 

 

 

 

498

 

 

 

(2

)

Total temporarily impaired securities

 

$

42,463

 

 

$

(1,147

)

 

$

19,726

 

 

$

(984

)

 

$

62,189

 

 

$

(2,131

)

 

 

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

June 30, 2019

 

Number of Securities

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed securities

 

 

45

 

 

$

983

 

 

$

 

 

$

31,302

 

 

$

(279

)

 

$

32,285

 

 

$

(279

)

State and municipal obligations

 

 

8

 

 

 

 

 

 

 

 

 

3,403

 

 

 

(37

)

 

 

3,403

 

 

 

(37

)

Corporate bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

 

53

 

 

$

983

 

 

$

 

 

$

34,705

 

 

$

(316

)

 

$

35,688

 

 

$

(316

)

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2017

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed

   securities

 

$

25,053

 

 

$

(353

)

 

$

16,184

 

 

$

(334

)

 

$

41,237

 

 

$

(687

)

States and municipal obligations

 

 

2,753

 

 

 

(15

)

 

 

5,787

 

 

 

(140

)

 

 

8,540

 

 

 

(155

)

Corporate bonds

 

 

498

 

 

 

(2

)

 

 

 

 

 

 

 

 

498

 

 

 

(2

)

Total temporarily impaired securities

 

$

28,304

 

 

$

(370

)

 

$

21,971

 

 

$

(474

)

 

$

50,275

 

 

$

(844

)

 

 

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2018

 

Number of Securities

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed securities

 

 

54

 

 

$

2,911

 

 

$

(22

)

 

$

43,843

 

 

$

(1,257

)

 

$

46,754

 

 

$

(1,279

)

State and municipal obligations

 

 

39

 

 

 

2,723

 

 

 

(27

)

 

 

9,119

 

 

 

(300

)

 

 

11,842

 

 

 

(327

)

Corporate bonds

 

 

5

 

 

 

5,742

 

 

 

(84

)

 

 

 

 

 

 

 

 

5,742

 

 

 

(84

)

Total temporarily impaired securities

 

 

98

 

 

$

11,376

 

 

$

(133

)

 

$

52,962

 

 

$

(1,557

)

 

$

64,338

 

 

$

(1,690

)

 

The following table presents the amortized cost and fair value by contractual maturity of available-for-sale securities available for sale as of the dates stated. Expected maturities may differ from contractual maturities, as borrowersissuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities that are not due at a single maturity date that do not have contractual maturities are shown separately.

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

State and municipal obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

1,632

 

 

$

1,631

 

 

$

1,241

 

 

$

1,237

 

 

$

1,543

 

 

$

1,545

 

 

$

1,080

 

 

$

1,079

 

Due after one year but less than five years

 

 

8,201

 

 

 

8,130

 

 

 

7,173

 

 

 

7,219

 

 

 

43,940

 

 

 

44,036

 

 

 

47,065

 

 

 

46,358

 

Due after five years but less than ten years

 

 

10,977

 

 

 

10,676

 

 

 

11,736

 

 

 

11,740

 

 

 

27,454

 

 

 

27,704

 

 

 

26,615

 

 

 

26,149

 

Due after ten years

 

 

471

 

 

 

454

 

 

 

963

 

 

 

957

 

 

 

7,994

 

 

 

7,884

 

 

 

9,044

 

 

 

8,646

 

U.S. Government agencies and mortgage backed securities

 

 

48,032

 

 

 

46,327

 

 

 

49,964

 

 

 

49,283

 

Corporate bonds

 

 

7,096

 

 

 

7,104

 

 

 

6,696

 

 

 

6,717

 

Total available-for-sale securities

 

$

76,409

 

 

$

74,322

 

 

$

77,773

 

 

$

77,153

 

 

$

80,931

 

 

$

81,169

 

 

$

83,804

 

 

$

82,232

 

 

Restricted Securities

The Company’s investment in FHLBFederal Home Loan Bank of Atlanta (“FHLB”) stock totaled $3.4$3.9 million and $3.7$5.1 million atas of June 30, 20182019 and December 31, 2017,2018, respectively. The Company also hadhas an investment in the Federal Reserve Bank of Richmond (“FRB”) stock, which totaled $2.1$2.6 million atas of June 30, 2019 and $2.3 million as of December 31, 2018 and $1.9 million ata stock investment in the Bank’s primary correspondent bank totaling $220 thousand as of June 30, 2019 and December 31, 2017.2018. The investments in both FHLB and FRB stock are required investments related to the Bank’s membership inwith the FHLB and FRB. These securities do not have a readily determinable fair value as their ownership is restricted, and they lack an active market for trading. Additionally, perpursuant to charter provisions related to the FHLB and FRB stock, all repurchase transactions of such stock must occur at par. Accordingly, these securities are carried at cost and are periodically evaluated for impairment.

Note 5:4: Loans

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income and costs, such as deferred fees and costs, charge-offs, and acquisition accounting adjustments (discounts)discounts or premiums on acquired or purchased loans. Interest on loans is recognized in earnings over the contractual term of the loan and is calculated using the effective interest method on principal amounts outstanding. Loan origination

13


fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs whereor principal curtailments, as applicable.

All interest accrued but not collected for loans that are placed on non-accrualnonaccrual or charged offcharged-off are reversed against interest income.income at the time the loans are placed in nonaccrual or charged-off. Any subsequent interest received on these loans is accounted for onrecognized as interest income under the cash basis or cost recovery method of accounting until qualifyingthe loan qualifies for return to accrual.accrual status. Generally, a loan is returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or itthe loan becomes well securedwell-secured and in the process of collection.

The following istable presents a summary of the balances of loans as of the dates stated.

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

81,059

 

 

$

66,042

 

Farmland

 

 

770

 

 

 

923

 

Commercial Mortgages (Non-Owner Occupied)

 

 

156,891

 

 

 

146,757

 

Commercial Mortgages (Owner Occupied)

 

 

80,258

 

 

 

80,052

 

Residential First Mortgages

 

 

285,477

 

 

 

269,365

 

Residential Revolving and Junior Mortgages

 

 

39,747

 

 

 

46,498

 

Commercial and Industrial

 

 

124,563

 

 

 

114,093

 

Consumer

 

 

32,767

 

 

 

42,566

 

Total loans

 

 

801,532

 

 

 

766,296

 

Net unamortized deferred loan costs

 

 

24

 

 

 

200

 

Allowance for loan losses

 

 

(7,113

)

 

 

(7,770

)

Loans, net

 

$

794,443

 

 

$

758,726

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

110,598

 

 

$

109,475

 

Commercial mortgages (non-owner occupied)

 

 

178,532

 

 

 

180,074

 

Commercial mortgages (owner occupied)

 

 

82,990

 

 

 

87,241

 

Residential first mortgages

 

 

305,252

 

 

 

298,894

 

Residential revolving and junior mortgages

 

 

35,875

 

 

 

38,313

 

Commercial and industrial

 

 

187,531

 

 

 

164,608

 

Consumer

 

 

16,889

 

 

 

23,740

 

Total loans

 

 

917,667

 

 

 

902,345

 

Net unamortized deferred loan fees

 

 

(275

)

 

 

(252

)

Allowance for loan losses

 

 

(7,479

)

 

 

(7,902

)

Loans receivable, net

 

$

909,913

 

 

$

894,191

 

 

As of June 30, 2019 and December 31, 2018, the Company had $261.7 million and $229.1 million, respectively, of loans pledged to the FHLB as collateral for borrowings.

The following tables present the recorded investment for past due, based upon contractual terms, and nonaccruingnonaccrual loans is shown in the following tables as of the dates stated. A loan past due by 90 days or more is generally placed on nonaccrual unless it is both well securedwell-secured and in the process of collection. Loans presented below as 90 days or more past due and still accruing include PCIpurchased credit-impaired (“PCI”) loans.

June 30, 2018

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccruals

 

 

Total Past

Due and

Nonaccruals

 

 

Current

 

 

Total

Loans

 

Mortgage Loans on Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

250

 

 

$

 

 

$

538

 

 

$

788

 

 

$

80,271

 

 

$

81,059

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

770

 

 

 

770

 

Commercial Mortgages (Non-Owner Occupied)

 

 

560

 

 

 

 

 

 

448

 

 

 

1,008

 

 

 

155,883

 

 

 

156,891

 

Commercial Mortgages (Owner Occupied)

 

 

121

 

 

 

 

 

 

939

 

 

 

1,060

 

 

 

79,198

 

 

 

80,258

 

Residential First Mortgages

 

 

2,323

 

 

 

65

 

 

 

1,055

 

 

 

3,443

 

 

 

282,034

 

 

 

285,477

 

Residential Revolving and Junior Mortgages

 

 

72

 

 

 

19

 

 

 

370

 

 

 

461

 

 

 

39,286

 

 

 

39,747

 

Commercial and Industrial

 

 

202

 

 

 

 

 

 

 

 

 

202

 

 

 

124,361

 

 

 

124,563

 

Consumer

 

 

351

 

 

 

3

 

 

 

124

 

 

 

478

 

 

 

32,289

 

 

 

32,767

 

Total loans

 

$

3,879

 

 

$

87

 

 

$

3,474

 

 

$

7,440

 

 

$

794,092

 

 

$

801,532

 


June 30, 2019

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

225

 

 

$

 

 

$

698

 

 

$

923

 

 

$

109,675

 

 

$

110,598

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

434

 

 

 

434

 

 

 

178,098

 

 

 

178,532

 

Commercial mortgages (owner occupied)

 

 

144

 

 

 

 

 

 

238

 

 

 

382

 

 

 

82,608

 

 

 

82,990

 

Residential first mortgages

 

 

1,063

 

 

 

156

 

 

 

1,984

 

 

 

3,203

 

 

 

302,049

 

 

 

305,252

 

Residential revolving and junior mortgages

 

 

99

 

 

 

 

 

 

936

 

 

 

1,035

 

 

 

34,840

 

 

 

35,875

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

187,531

 

 

 

187,531

 

Consumer

 

 

279

 

 

 

 

 

 

287

 

 

 

566

 

 

 

16,323

 

 

 

16,889

 

Total loans

 

$

1,810

 

 

$

156

 

 

$

4,577

 

 

$

6,543

 

 

$

911,124

 

 

$

917,667

 

 

December 31, 2017

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccruals

 

 

Total Past

Due and

Nonaccruals

 

 

Current

 

 

Total

Loans

 

Mortgage Loans on Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

261

 

 

$

 

 

$

1,237

 

 

$

1,498

 

 

$

64,544

 

 

$

66,042

 

Farmland

 

 

 

 

 

48

 

 

 

 

 

 

48

 

 

 

875

 

 

 

923

 

Commercial Mortgages (Non-Owner Occupied)

 

 

449

 

 

 

 

 

 

 

 

 

449

 

 

 

146,308

 

 

 

146,757

 

Commercial Mortgages (Owner Occupied)

 

 

573

 

 

 

 

 

 

1,752

 

 

 

2,325

 

 

 

77,727

 

 

 

80,052

 

Residential First Mortgages

 

 

2,670

 

 

 

141

 

 

 

1,942

 

 

 

4,753

 

 

 

264,612

 

 

 

269,365

 

Residential Revolving and Junior Mortgages

 

 

449

 

 

 

20

 

 

 

1,338

 

 

 

1,807

 

 

 

44,691

 

 

 

46,498

 

Commercial and Industrial

 

 

331

 

 

 

 

 

 

92

 

 

 

423

 

 

 

113,670

 

 

 

114,093

 

Consumer

 

 

288

 

 

 

4

 

 

 

135

 

 

 

427

 

 

 

42,139

 

 

 

42,566

 

Total loans

 

$

5,021

 

 

$

213

 

 

$

6,496

 

 

$

11,730

 

 

$

754,566

 

 

$

766,296

 

December 31, 2018

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

552

 

 

$

 

 

$

740

 

 

$

1,292

 

 

$

108,183

 

 

$

109,475

 

Commercial mortgages (non-owner occupied)

 

 

50

 

 

 

 

 

 

996

 

 

 

1,046

 

 

 

179,028

 

 

 

180,074

 

Commercial mortgages (owner occupied)

 

 

 

 

 

56

 

 

 

1,064

 

 

 

1,120

 

 

 

86,121

 

 

 

87,241

 

Residential first mortgages

 

 

1,341

 

 

 

55

 

 

 

1,361

 

 

 

2,757

 

 

 

296,137

 

 

 

298,894

 

Residential revolving and junior mortgages

 

 

115

 

 

 

 

 

 

782

 

 

 

897

 

 

 

37,416

 

 

 

38,313

 

Commercial and industrial

 

 

 

 

 

 

 

 

48

 

 

 

48

 

 

 

164,560

 

 

 

164,608

 

Consumer

 

 

329

 

 

 

 

 

 

215

 

 

 

544

 

 

 

23,196

 

 

 

23,740

 

Total loans

 

$

2,387

 

 

$

111

 

 

$

5,206

 

 

$

7,704

 

 

$

894,641

 

 

$

902,345

 


The following tables include an aging analysis, based upon contractual terms, of the recorded investment of PCI loans included in the tables above, as of the dates stated, includedstated.

June 30, 2019

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

16

 

 

$

 

 

$

 

 

$

16

 

 

$

1,360

 

 

$

1,376

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

129

 

 

 

129

 

Commercial mortgages (owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

274

 

 

 

274

 

Residential first mortgages

 

 

30

 

 

 

156

 

 

 

 

 

 

186

 

 

 

3,088

 

 

 

3,274

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

45

 

Total purchased credit-impaired loans

 

$

46

 

 

$

156

 

 

$

 

 

$

202

 

 

$

4,896

 

 

$

5,098

 

December 31, 2018

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

23

 

 

$

 

 

$

 

 

$

23

 

 

$

1,355

 

 

$

1,378

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

142

 

 

 

142

 

Commercial mortgages (owner occupied)

 

 

 

 

 

56

 

 

 

 

 

 

56

 

 

 

237

 

 

 

293

 

Residential first mortgages

 

 

92

 

 

 

55

 

 

 

 

 

 

147

 

 

 

3,317

 

 

 

3,464

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

 

 

46

 

Total purchased credit-impaired loans

 

$

115

 

 

$

111

 

 

$

 

 

$

226

 

 

$

5,097

 

 

$

5,323

 

The following table presents the changes in accretable yield for PCI loans for the period stated.


 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

Balance as of December 31, 2018

 

$

1,083

 

Accretion of acquisition accounting adjustment

 

 

(184

)

Reclassifications from nonaccretable balance, net

 

 

55

 

Other changes, net

 

 

(96

)

Balance as of June 30, 2019

 

$

858

 

Internal Risk Rating Grades

Loans in the Company’s loan portfolio are risk rated on a periodic basis by experienced credit personnel.

  Risk rating categories are as follows:

Pass – Several pass credit grades comprise loans in this category, which are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to management attention credits that have all characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the loan. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as an asset is not warranted.


14


The following tables above.present the Company’s risk rating of loans by loan type as of the dates stated.

 

June 30, 2018

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccruals

 

 

Total Past

Due and

Nonaccruals

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage Loans on Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,390

 

 

$

1,390

 

Commercial Mortgages (Non-Owner Occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

156

 

 

 

156

 

Commercial Mortgages (Owner Occupied)

 

 

121

 

 

 

 

 

 

 

 

 

121

 

 

 

182

 

 

 

303

 

Residential First Mortgages

 

 

23

 

 

 

65

 

 

 

 

 

 

88

 

 

 

3,599

 

 

 

3,687

 

Residential Revolving and Junior Mortgages

 

 

 

 

 

19

 

 

 

 

 

 

19

 

 

 

23

 

 

 

42

 

Consumer

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

57

 

 

 

60

 

Total purchased credit-impaired loans

 

$

144

 

 

$

87

 

 

$

 

 

$

231

 

 

$

5,407

 

 

$

5,638

 

June 30, 2019

 

Construction,

Land and

Land

Development

 

 

Commercial

Mortgages

(Non-Owner Occupied)

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Residential

First

Mortgages

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

108,524

 

 

$

177,969

 

 

$

82,423

 

 

$

301,753

 

 

$

34,552

 

 

$

180,375

 

 

$

16,598

 

 

$

902,194

 

Special mention

 

 

 

 

 

 

 

 

154

 

 

 

478

 

 

 

63

 

 

 

5,951

 

 

 

 

 

 

6,646

 

Substandard

 

 

2,074

 

 

 

563

 

 

 

413

 

 

 

3,021

 

 

 

1,260

 

 

 

1,205

 

 

 

291

 

 

 

8,827

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

110,598

 

 

$

178,532

 

 

$

82,990

 

 

$

305,252

 

 

$

35,875

 

 

$

187,531

 

 

$

16,889

 

 

$

917,667

 

 

December 31, 2017

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccruals

 

 

Total Past

Due and

Nonaccruals

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage Loans on Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,405

 

 

$

1,405

 

Commercial Mortgages (Non-Owner Occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

171

 

 

 

171

 

Commercial Mortgages (Owner Occupied)

 

 

161

 

 

 

 

 

 

 

 

 

161

 

 

 

160

 

 

 

321

 

Residential First Mortgages

 

 

349

 

 

 

141

 

 

 

 

 

 

490

 

 

 

3,320

 

 

 

3,810

 

Residential Revolving and Junior Mortgages

 

 

 

 

 

20

 

 

 

 

 

 

20

 

 

 

29

 

 

 

49

 

Consumer

 

 

 

 

 

4

 

 

 

 

 

 

4

 

 

 

65

 

 

 

69

 

Total purchased credit-impaired loans

 

$

510

 

 

$

165

 

 

$

 

 

$

675

 

 

$

5,150

 

 

$

5,825

 

December 31, 2018

 

Construction,

Land and

Land

Development

 

 

Commercial

Mortgages

(Non-Owner

Occupied)

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Residential

First

Mortgages

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

107,306

 

 

$

178,936

 

 

$

85,897

 

 

$

295,372

 

 

$

37,206

 

 

$

162,392

 

 

$

23,389

 

 

$

890,498

 

Special mention

 

 

68

 

 

 

 

 

 

107

 

 

 

1,071

 

 

 

 

 

 

893

 

 

 

121

 

 

 

2,260

 

Substandard

 

 

2,101

 

 

 

1,138

 

 

 

1,237

 

 

 

2,451

 

 

 

1,107

 

 

 

1,323

 

 

 

230

 

 

 

9,587

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

109,475

 

 

$

180,074

 

 

$

87,241

 

 

$

298,894

 

 

$

38,313

 

 

$

164,608

 

 

$

23,740

 

 

$

902,345

 

 

Note 6:5: Allowance for Loan Losses

The allowance for loan losses (“ALL”) reflects management’s judgment of probable loan losses inherent in the loan portfolio atas of the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter.quarter-end. To determine the total ALL, the Company estimates the reserves needed for each homogenous segment and classtype of the loan portfolio, and anyin addition to loans analyzed individually for impairment. Depending on the nature of each segment and class,loan type, considerations include historical loss experience, adverse situations that may affect a borrower’s ability to repay, credit scores, past due history, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as conditions change.

The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating each one individually to calculate the amount of impairment. Impaired loans measured individually for impairment generally include (1) any loan risk rated Special Mention or worse where the borrower has filed for bankruptcy; and (2) all loans risk rated Substandard or worse with balances of $400 thousand or more; and (3) all loans classified as a troubled debt restructuring (“TDR”). A specific allowance arises whenFor the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component of the ALL, the Company collectively evaluates any loans not identified asevaluated individually for a specific reserve, including impaired loans risk rated Substandard or worse with balances less than $400 thousand. All loans evaluated as impaired andcollectively are grouped into segmentstypes, and classes. Historicalhistorical loss experience is calculated and applied to each segment or class, thenloan type and the resultant reserve is adjusted for qualitative factors. Qualitative factors include changes in local and national economic indicators, such as unemployment rates, interest rates, gross domestic product growth, and real estate market trends; the level of past due and nonaccrual loans; risk ratings on individual loans; strength of credit policies and procedures; loan officer experience; borrower credit scores; and other intrinsic risks related to the types and geographic locations of loans. These qualitative adjustments reflect management’s judgment of risks inherent in the segments.loan types. An unallocated component is maintained, if needed, to cover uncertainties that could affect management’s estimate of probable losses. Changes in the allowance for loan losses and the related provision expense can materially affect net income.


15


Loans Evaluated for Impairment

The following tables showtable presents the ALL by loans evaluated for impairment individually and collectively by segmentloan type as of the dates stated.

 

June 30, 2018

 

Mortgage

Loans

on Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

and Other

 

 

Total

 

June 30, 2019

 

Mortgage

Loans

on Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Allowance for loan losses applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,125

 

 

$

 

 

$

131

 

 

$

1,256

 

 

$

987

 

 

$

 

 

$

119

 

 

$

1,106

 

Loans collectively evaluated for impairment

 

 

3,119

 

 

 

944

 

 

 

1,794

 

 

 

5,857

 

 

 

4,065

 

 

 

1,537

 

 

 

771

 

 

 

6,373

 

Purchased credit impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance on loan losses

 

$

4,244

 

 

$

944

 

 

$

1,925

 

 

$

7,113

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

5,052

 

 

$

1,537

 

 

$

890

 

 

$

7,479

 

Loan balances applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

8,037

 

 

$

 

 

$

131

 

 

$

8,168

 

 

$

7,358

 

 

$

 

 

$

119

 

 

$

7,477

 

Loans collectively evaluated for impairment

 

 

630,587

 

 

 

124,563

 

 

 

32,576

 

 

 

787,726

 

 

 

700,837

 

 

 

187,531

 

 

 

16,724

 

 

 

905,092

 

Purchased credit impaired loans

 

 

5,578

 

 

 

 

 

 

60

 

 

 

5,638

 

Purchased credit-impaired loans

 

 

5,052

 

 

 

 

 

 

46

 

 

 

5,098

 

Total loans

 

$

644,202

 

 

$

124,563

 

 

$

32,767

 

 

$

801,532

 

 

$

713,247

 

 

$

187,531

 

 

$

16,889

 

 

$

917,667

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

861

 

 

$

92

 

 

$

141

 

 

$

1,094

 

 

$

1,036

 

 

$

 

 

$

121

 

 

$

1,157

 

Loans collectively evaluated for impairment

 

 

3,003

 

 

 

786

 

 

 

2,887

 

 

 

6,676

 

 

 

3,931

 

 

 

1,374

 

 

 

1,440

 

 

 

6,745

 

Purchased credit impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance on loan losses

 

$

3,864

 

 

$

878

 

 

$

3,028

 

 

$

7,770

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

4,967

 

 

$

1,374

 

 

$

1,561

 

 

$

7,902

 

Loan balances applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

8,874

 

 

$

92

 

 

$

141

 

 

$

9,107

 

 

$

7,485

 

 

$

 

 

$

121

 

 

$

7,606

 

Loans collectively evaluated for impairment

 

 

595,007

 

 

 

114,001

 

 

 

42,356

 

 

 

751,364

 

 

 

701,235

 

 

 

164,608

 

 

 

23,573

 

 

 

889,416

 

Purchased credit impaired loans

 

 

5,756

 

 

 

 

 

 

69

 

 

 

5,825

 

Purchased credit-impaired loans

 

 

5,277

 

 

 

 

 

 

46

 

 

 

5,323

 

Total loans

 

$

609,637

 

 

$

114,093

 

 

$

42,566

 

 

$

766,296

 

 

$

713,997

 

 

$

164,608

 

 

$

23,740

 

 

$

902,345

 

 

16


The following tables showpresent an analysis of the change in the ALL by segmentloan type for the periods presented.

 

For the Three Months Ended June 30, 2019

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning Balance

 

$

5,259

 

 

$

1,406

 

 

$

1,193

 

 

$

7,858

 

Charge-offs

 

 

(105

)

 

 

 

 

 

(411

)

 

 

(516

)

Recoveries

 

 

18

 

 

 

 

 

 

57

 

 

 

75

 

Provision (recovery of)

 

 

(120

)

 

 

131

 

 

 

51

 

 

 

62

 

Ending Balance

 

$

5,052

 

 

$

1,537

 

 

$

890

 

 

$

7,479

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning Balance

 

$

4,190

 

 

$

1,043

 

 

$

2,690

 

 

$

7,923

 

 

$

4,190

 

 

$

1,043

 

 

$

2,690

 

 

$

7,923

 

(Charge-offs)

 

 

(83

)

 

 

(101

)

 

 

(335

)

 

 

(519

)

Charge-offs

 

 

(83

)

 

 

(101

)

 

 

(335

)

 

 

(519

)

Recoveries

 

 

16

 

 

 

 

 

 

41

 

 

 

57

 

 

 

16

 

 

 

 

 

 

41

 

 

 

57

 

Provision (recovery)

 

 

121

 

 

 

2

 

 

 

(471

)

 

 

(348

)

Provision (recovery of)

 

 

121

 

 

 

2

 

 

 

(471

)

 

 

(348

)

Ending Balance

 

$

4,244

 

 

$

944

 

 

$

1,925

 

 

$

7,113

 

 

$

4,244

 

 

$

944

 

 

$

1,925

 

 

$

7,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

For the Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning Balance

 

$

3,421

 

 

$

528

 

 

$

44

 

 

$

3,993

 

 

$

4,967

 

 

$

1,374

 

 

$

1,561

 

 

$

7,902

 

(Charge-offs)

 

 

(141

)

 

 

 

 

 

(193

)

 

 

(334

)

Charge-offs

 

 

(159

)

 

 

-

 

 

 

(819

)

 

 

(978

)

Recoveries

 

 

10

 

 

 

1

 

 

 

3

 

 

 

14

 

 

 

43

 

 

 

1

 

 

 

135

 

 

 

179

 

Provision (recovery)

 

 

396

 

 

 

(73

)

 

 

245

 

 

 

568

 

Provision

 

 

201

 

 

 

162

 

 

 

13

 

 

 

376

 

Ending Balance

 

$

3,686

 

 

$

456

 

 

$

99

 

 

$

4,241

 

 

$

5,052

 

 

$

1,537

 

 

$

890

 

 

$

7,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning Balance

 

$

3,864

 

 

$

878

 

 

$

3,028

 

 

$

7,770

 

 

$

3,864

 

 

$

878

 

 

$

3,028

 

 

$

7,770

 

(Charge-offs)

 

 

(114

)

 

 

(116

)

 

 

(677

)

 

 

(907

)

Charge-offs

 

 

(114

)

 

 

(116

)

 

 

(677

)

 

 

(907

)

Recoveries

 

 

43

 

 

 

 

 

 

235

 

 

 

278

 

 

 

43

 

 

 

 

 

 

235

 

 

 

278

 

Provision (recovery)

 

 

451

 

 

 

182

 

 

 

(661

)

 

 

(28

)

Provision (recovery of)

 

 

451

 

 

 

182

 

 

 

(661

)

 

 

(28

)

Ending Balance

 

$

4,244

 

 

$

944

 

 

$

1,925

 

 

$

7,113

 

 

$

4,244

 

 

$

944

 

 

$

1,925

 

 

$

7,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

For the Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

3,318

 

 

$

493

 

 

$

52

 

 

$

3,863

 

(Charge-offs)

 

 

(273

)

 

 

 

 

 

(201

)

 

 

(474

)

Recoveries

 

 

88

 

 

 

1

 

 

 

5

 

 

 

94

 

Provision (recovery)

 

 

553

 

 

 

(38

)

 

 

243

 

 

 

758

 

Ending Balance

 

$

3,686

 

 

$

456

 

 

$

99

 

 

$

4,241

 


Purchased Credit 17


Impaired Loans

The following table presents the changes in the accretable yield for PCI loans for the period presented.

 

 

For the Six Months Ended

 

 

 

June 30, 2018

 

Balance as of December 31, 2017

 

$

1,087

 

Accretion of acquisition accounting adjustment

 

 

(171

)

Reclassifications from nonaccretable balance, net

 

 

69

 

Other changes, net

 

 

175

 

Balance as of June 30, 2018

 

$

1,160

 

Internal Risk Rating Grades

All loans in the Company’s loan portfolio, with the exception of purchased consumer loans, are risk graded using loan risk grading software that employs a variety of algorithms based on detailed account characteristics to include borrower’s payment history on a total relationship basis as well as loan to value exposure. For non-homogenous loans, management reviews these resulting grade

17


assignments and makes adjustments to the final grade where appropriate based on an assessment of additional external information that may affect a particular loan. For purchased consumer loans, a loan is graded “substandard” when it is 90 days or more past due; otherwise, the loan is graded “pass”.

  Risk rating categories are as follows:

Pass – Borrower is strong or sound and collateral securing the loan, if any, is adequate.

Watch – Borrower exhibits some signs of financial stress but is generally believed to be a satisfactory customer and collateral, if any, may be in excess of 90% of the loan balance.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the debt. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as a bankable asset is not warranted.

The tables below show the risk ranking of loans as of the dates stated.

June 30, 2018

 

Construction,

Land and

Land

Development

 

 

Farmland

 

 

Residential

First

Mortgages

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

Mortgages

(Non-Owner Occupied)

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

72,229

 

 

$

770

 

 

$

273,382

 

 

$

37,869

 

 

$

151,342

 

 

$

73,781

 

 

$

121,571

 

 

$

11,225

 

 

$

742,169

 

Watch

 

 

6,673

 

 

 

 

 

 

7,779

 

 

 

1,165

 

 

 

4,946

 

 

 

4,798

 

 

 

1,691

 

 

 

21,264

 

 

 

48,316

 

Special mention

 

 

 

 

 

 

 

 

2,503

 

 

 

 

 

 

 

 

 

557

 

 

 

 

 

 

131

 

 

 

3,191

 

Substandard

 

 

2,157

 

 

 

 

 

 

1,813

 

 

 

713

 

 

 

603

 

 

 

1,122

 

 

 

1,301

 

 

 

142

 

 

 

7,851

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Total loans

 

$

81,059

 

 

$

770

 

 

$

285,477

 

 

$

39,747

 

 

$

156,891

 

 

$

80,258

 

 

$

124,563

 

 

$

32,767

 

 

$

801,532

 

December 31, 2017

 

Construction,

Land and

Land

Development

 

 

Farmland

 

 

Residential

First

Mortgages

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

Mortgages

(Non-Owner

Occupied)

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

55,949

 

 

$

923

 

 

$

256,614

 

 

$

43,659

 

 

$

140,625

 

 

$

67,732

 

 

$

110,281

 

 

$

12,431

 

 

$

688,214

 

Watch

 

 

6,690

 

 

 

 

 

 

8,624

 

 

 

1,376

 

 

 

5,931

 

 

 

10,076

 

 

 

2,373

 

 

 

29,917

 

 

 

64,987

 

Special mention

 

 

172

 

 

 

 

 

 

205

 

 

 

 

 

 

 

 

 

 

 

 

1,347

 

 

 

 

 

 

1,724

 

Substandard

 

 

3,231

 

 

 

 

 

 

3,922

 

 

 

1,463

 

 

 

201

 

 

 

2,244

 

 

 

92

 

 

 

218

 

 

 

11,371

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

66,042

 

 

$

923

 

 

$

269,365

 

 

$

46,498

 

 

$

146,757

 

 

$

80,052

 

 

$

114,093

 

 

$

42,566

 

 

$

766,296

 

Impaired Loans

The following tables show the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, by loan type as of the dates stated.


 

 

As of June 30, 2018

 

 

As of December 31, 2017

 

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

93

 

 

$

164

 

 

$

 

 

$

900

 

 

$

1,378

 

 

$

 

Residential First Mortgages

 

 

1,598

 

 

 

1,852

 

 

 

 

 

 

1,488

 

 

 

1,488

 

 

 

 

Residential Revolving and Junior Mortgages

 

 

416

 

 

 

416

 

 

 

 

 

 

414

 

 

 

414

 

 

 

 

Commercial Mortgages (Non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgages (Owner occupied)

 

 

1,404

 

 

 

1,404

 

 

 

 

 

 

1,721

 

 

 

1,971

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer-Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no related allowance

 

 

3,511

 

 

 

3,836

 

 

 

 

 

 

4,523

 

 

 

5,251

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

 

571

 

 

 

571

 

 

 

257

 

 

 

550

 

 

 

621

 

 

 

137

 

Residential First Mortgages

 

 

2,842

 

 

 

2,842

 

 

 

594

 

 

 

1,914

 

 

 

1,914

 

 

 

367

 

Residential Revolving and Junior Mortgages

 

 

130

 

 

 

527

 

 

 

67

 

 

 

1,340

 

 

 

1,340

 

 

 

162

 

Commercial Mortgages (Non-owner occupied)

 

 

448

 

 

 

448

 

 

 

46

 

 

 

 

 

 

 

 

 

 

Commercial Mortgages (Owner occupied)

 

 

535

 

 

 

535

 

 

 

161

 

 

 

547

 

 

 

586

 

 

 

195

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

92

 

 

 

92

 

Consumer-Other

 

 

131

 

 

 

131

 

 

 

131

 

 

 

141

 

 

 

141

 

 

 

141

 

Total impaired loans with allowance recorded

 

 

4,657

 

 

 

5,054

 

 

 

1,256

 

 

 

4,584

 

 

 

4,694

 

 

 

1,094

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

 

664

 

 

 

735

 

 

 

257

 

 

 

1,450

 

 

 

1,999

 

 

 

137

 

Residential First Mortgages

 

 

4,440

 

 

 

4,694

 

 

 

594

 

 

 

3,402

 

 

 

3,402

 

 

 

367

 

Residential Revolving and Junior Mortgages

 

 

546

 

 

 

943

 

 

 

67

 

 

 

1,754

 

 

 

1,754

 

 

 

162

 

Commercial Mortgages (Non-owner occupied)

 

 

448

 

 

 

448

 

 

 

46

 

 

 

 

 

 

 

 

 

 

Commercial Mortgages (Owner occupied)

 

 

1,939

 

 

 

1,939

 

 

 

161

 

 

 

2,268

 

 

 

2,557

 

 

 

195

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

92

 

 

 

92

 

Consumer-Other

 

 

131

 

 

 

131

 

 

 

131

 

 

 

141

 

 

 

141

 

 

 

141

 

Total Impaired Loans

 

$

8,168

 

 

$

8,890

 

 

$

1,256

 

 

$

9,107

 

 

$

9,945

 

 

$

1,094

 

 

 

As of June 30, 2019

 

 

As of December 31, 2018

 

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

328

 

 

$

399

 

 

$

 

 

$

335

 

 

$

406

 

 

$

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

386

 

 

 

386

 

 

 

 

Commercial mortgages (owner occupied)

 

 

429

 

 

 

429

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

 

1,385

 

 

 

1,385

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

1,028

 

 

 

1,028

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no related allowance

 

 

2,142

 

 

 

2,213

 

 

 

 

 

 

1,749

 

 

 

1,820

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

176

 

 

 

176

 

 

 

39

 

 

 

275

 

 

 

275

 

 

 

132

 

Commercial mortgages (non-owner occupied)

 

 

434

 

 

 

434

 

 

 

34

 

 

 

443

 

 

 

443

 

 

 

18

 

Commercial mortgages (owner occupied)

 

 

1,058

 

 

 

1,058

 

 

 

54

 

 

 

1,069

 

 

 

1,069

 

 

 

57

 

Residential first mortgages

 

 

3,048

 

 

 

3,048

 

 

 

644

 

 

 

3,447

 

 

 

3,447

 

 

 

565

 

Residential revolving and junior mortgages

 

 

500

 

 

 

500

 

 

 

216

 

 

 

502

 

 

 

502

 

 

 

264

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

119

 

 

 

119

 

 

 

119

 

 

 

121

 

 

 

121

 

 

 

121

 

Total impaired loans with allowance recorded

 

 

5,335

 

 

 

5,335

 

 

 

1,106

 

 

 

5,857

 

 

 

5,857

 

 

 

1,157

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

504

 

 

 

575

 

 

 

39

 

 

 

610

 

 

 

681

 

 

 

132

 

Commercial mortgages (non-owner occupied)

 

 

434

 

 

 

434

 

 

 

34

 

 

 

829

 

 

 

829

 

 

 

18

 

Commercial mortgages (owner occupied)

 

 

1,487

 

 

 

1,487

 

 

 

54

 

 

 

1,069

 

 

 

1,069

 

 

 

57

 

Residential first mortgages

 

 

4,433

 

 

 

4,433

 

 

 

644

 

 

 

3,447

 

 

 

3,447

 

 

 

565

 

Residential revolving and junior mortgages

 

 

500

 

 

 

500

 

 

 

216

 

 

 

1,530

 

 

 

1,530

 

 

 

264

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

119

 

 

 

119

 

 

 

119

 

 

 

121

 

 

 

121

 

 

 

121

 

Total impaired loans

 

$

7,477

 

 

$

7,548

 

 

$

1,106

 

 

$

7,606

 

 

$

7,677

 

 

$

1,157

 

 

1918


The following table showspresents the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, by loan type for the periods presented.

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

84

 

 

$

 

 

$

1,453

 

 

$

14

 

 

$

165

 

 

$

1

 

 

$

1,479

 

 

$

27

 

Residential First Mortgages

 

 

1,513

 

 

 

24

 

 

 

1,769

 

 

 

2

 

 

 

1,471

 

 

 

41

 

 

 

1,774

 

 

 

7

 

Residential Revolving and Junior Mortgages

 

 

415

 

 

 

1

 

 

 

162

 

 

 

 

 

 

415

 

 

 

3

 

 

 

162

 

 

 

1

 

Commercial Mortgages (Non-owner occupied)

 

 

 

 

 

 

 

 

247

 

 

 

5

 

 

 

 

 

 

 

 

 

248

 

 

 

8

 

Commercial Mortgages (Owner occupied)

 

 

1,385

 

 

 

20

 

 

 

1,689

 

 

 

4

 

 

 

1,380

 

 

 

32

 

 

 

1,777

 

 

 

11

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer - Other

 

 

���

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no allowance

 

 

3,397

 

 

 

48

 

 

 

5,320

 

 

 

25

 

 

 

3,431

 

 

 

77

 

 

 

5,440

 

 

 

54

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

571

 

 

 

8

 

 

 

236

 

 

 

1

 

 

 

553

 

 

 

17

 

 

 

238

 

 

 

2

 

Residential First Mortgages

 

 

2,623

 

 

 

36

 

 

 

1,938

 

 

 

23

 

 

 

2,386

 

 

 

67

 

 

 

1,942

 

 

 

47

 

Residential Revolving and Junior Mortgages

 

 

131

 

 

 

2

 

 

 

1,300

 

 

 

5

 

 

 

123

 

 

 

4

 

 

 

1,301

 

 

 

18

 

Commercial Mortgages (Non-owner occupied)

 

 

224

 

 

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

 

Commercial Mortgages (Owner occupied)

 

 

538

 

 

 

8

 

 

 

737

 

 

 

 

 

 

541

 

 

 

15

 

 

 

739

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

 

Consumer - Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

Total impaired loans with allowance recorded

 

 

4,087

 

 

 

54

 

 

 

4,303

 

 

 

29

 

 

 

3,752

 

 

 

108

 

 

 

4,312

 

 

 

67

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

655

 

 

 

8

 

 

 

1,689

 

 

 

15

 

 

 

718

 

 

 

18

 

 

 

1,717

 

 

 

29

 

Residential First Mortgages

 

 

4,136

 

 

 

60

 

 

 

3,707

 

 

 

25

 

 

 

3,857

 

 

 

108

 

 

 

3,716

 

 

 

54

 

Residential Revolving and Junior Mortgages

 

 

546

 

 

 

3

 

 

 

1,462

 

 

 

5

 

 

 

538

 

 

 

7

 

 

 

1,463

 

 

 

19

 

Commercial Mortgages (Non-owner occupied)

 

 

224

 

 

 

 

 

 

247

 

 

 

5

 

 

 

149

 

 

 

 

 

 

248

 

 

 

8

 

Commercial Mortgages (Owner occupied)

 

 

1,923

 

 

 

28

 

 

 

2,426

 

 

 

4

 

 

 

1,921

 

 

 

47

 

 

 

2,516

 

 

 

11

 

Commercial and Industrial

 

 

 

 

 

 

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

 

Consumer - Other

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

Total impaired loans

 

$

7,484

 

 

$

102

 

 

$

9,623

 

 

$

54

 

 

$

7,183

 

 

$

185

 

 

$

9,752

 

 

$

121

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

330

 

 

$

4

 

 

$

84

 

 

$

 

 

$

332

 

 

$

9

 

 

$

165

 

 

$

1

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgages (owner occupied)

 

 

405

 

 

 

7

 

 

 

1,385

 

 

 

20

 

 

 

399

 

 

 

13

 

 

 

1,380

 

 

 

32

 

Residential first mortgages

 

 

1,389

 

 

 

18

 

 

 

1,513

 

 

 

24

 

 

 

1,391

 

 

 

36

 

 

 

1,471

 

 

 

41

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

415

 

 

 

1

 

 

 

 

 

 

 

 

 

415

 

 

 

3

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no allowance

 

 

2,124

 

 

 

29

 

 

 

3,397

 

 

 

48

 

 

 

2,122

 

 

 

58

 

 

 

3,431

 

 

 

77

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

225

 

 

 

10

 

 

 

571

 

 

 

8

 

 

 

241

 

 

 

15

 

 

 

553

 

 

 

17

 

Commercial mortgages (non-owner occupied)

 

 

435

 

 

 

4

 

 

 

224

 

 

 

 

 

 

437

 

 

 

27

 

 

 

149

 

 

 

 

Commercial mortgages (owner occupied)

 

 

1,061

 

 

 

14

 

 

 

538

 

 

 

8

 

 

 

1,063

 

 

 

28

 

 

 

541

 

 

 

15

 

Residential first mortgages

 

 

3,055

 

 

 

34

 

 

 

2,623

 

 

 

36

 

 

 

3,065

 

 

 

65

 

 

 

2,386

 

 

 

67

 

Residential revolving and junior mortgages

 

 

501

 

 

 

3

 

 

 

131

 

 

 

2

 

 

 

501

 

 

 

6

 

 

 

123

 

 

 

4

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

120

 

 

 

2

 

 

 

 

 

 

 

 

 

120

 

 

 

5

 

 

 

 

 

 

5

 

Total impaired loans with allowance recorded

 

 

5,397

 

 

 

67

 

 

 

4,087

 

 

 

54

 

 

 

5,427

 

 

 

146

 

 

 

3,752

 

 

 

108

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

555

 

 

 

14

 

 

 

655

 

 

 

8

 

 

 

573

 

 

 

24

 

 

 

718

 

 

 

18

 

Commercial mortgages (non-owner occupied)

 

 

435

 

 

 

4

 

 

 

224

 

 

 

 

 

 

437

 

 

 

27

 

 

 

149

 

 

 

 

Commercial mortgages (owner occupied)

 

 

1,466

 

 

 

21

 

 

 

1,923

 

 

 

28

 

 

 

1,462

 

 

 

41

 

 

 

1,921

 

 

 

47

 

Residential first mortgages

 

 

4,444

 

 

 

52

 

 

 

4,136

 

 

 

60

 

 

 

4,456

 

 

 

101

 

 

 

3,857

 

 

 

108

 

Residential revolving and junior mortgages

 

 

501

 

 

 

3

 

 

 

546

 

 

 

3

 

 

 

501

 

 

 

6

 

 

 

538

 

 

 

7

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

120

 

 

 

2

 

 

 

 

 

 

3

 

 

 

120

 

 

 

5

 

 

 

 

 

 

5

 

Total impaired loans

 

$

7,521

 

 

$

96

 

 

$

7,484

 

 

$

102

 

 

$

7,549

 

 

$

204

 

 

$

7,183

 

 

$

185

 

 

The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated.

 

 

June 30,

2018

 

 

December 31,

2017

 

 

June 30, 2019

 

 

December 31, 2018

 

Nonaccrual loans

 

$

3,474

 

 

$

6,496

 

 

$

4,577

 

 

$

5,206

 

Nonaccrual loans not individually evaluated for impairment

 

 

(1,279

)

 

 

(854

)

Nonaccrual loans collectively evaluated for impairment

 

 

(1,470

)

 

 

(2,040

)

Nonaccrual impaired loans

 

 

2,195

 

 

 

5,642

 

 

 

3,107

 

 

 

3,166

 

TDRs on accrual

 

 

3,803

 

 

 

2,214

 

 

 

4,046

 

 

 

4,115

 

Other impaired loans on accrual

 

 

2,170

 

 

 

1,251

 

 

 

324

 

 

 

325

 

Total impaired loans

 

$

8,168

 

 

$

9,107

 

 

$

7,477

 

 

$

7,606

 


Troubled Debt RestructuringRestructurings

In some situations, for19


For economic or legal reasons related to a borrower’s financial condition, management may grant a concession to a borrower that it would not otherwise consider. In cases where borrowers are experiencing financial difficulties and are granted new terms that provide for a reduction of either interest or principal or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risks, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and may work with them to modify their loanloan(s) to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss to the Company and to avoid foreclosure or repossession of the collateral. Management measures all TDRs for impairmentare classified as noted below for impaired loans.TDRs.

Loans modified as

TDRs are considered impaired and are individually evaluated for impairment for the ALL. The following table presents,tables present by segment,loan type information related to loans modified as TDRs for the periods presented.

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Residential first mortgages  (1)

 

 

1

 

 

$

30

 

 

$

30

 

 

 

 

 

$

 

 

$

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Commercial Mortgages (Owner Occupied) (1)

 

 

1

 

 

$

48

 

 

$

52

 

 

 

 

 

$

 

 

$

 

Residential first mortgages (1)

 

 

 

 

$

 

 

$

 

 

 

1

 

 

$

30

 

 

$

30

 

 

(1)

Modifications were an extension of the loan terms.term.

 

 

 

For the Six Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Residential first mortgages  (1)

 

 

4

 

 

$

590

 

 

$

594

 

 

 

 

 

$

 

 

$

 

 

 

For the Six Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Commercial Mortgages (Owner Occupied) (1)

 

 

1

 

 

$

48

 

 

$

52

 

 

 

 

 

$

 

 

$

 

Residential first mortgages (1)

 

 

 

 

$

 

 

$

 

 

 

4

 

 

$

590

 

 

$

594

 

(1)

ModificationModifications were an extension of the loan terms.term.

No loans designated as TDRs subsequently defaulted in the first three or six months 2018of 2019 or 2017.2018.

The following table presents a roll forwardroll-forward of accruing and nonaccruingnonaccrual TDRs for the period presented.

 

 

Accruing

 

 

Nonaccruing

 

 

Total

 

 

Accruing

 

 

Nonaccrual

 

 

Total

 

Balance as of December 31, 2017

 

$

1,452

 

 

$

2,612

 

 

$

4,064

 

Balance as of December 31, 2018

 

$

4,115

 

 

$

1,477

 

 

$

5,592

 

Charge-offs

 

 

 

 

 

(92

)

 

 

(92

)

 

 

 

 

 

 

 

 

 

Payments and other adjustments

 

 

(41

)

 

 

7

 

 

 

(34

)

 

 

(52

)

 

 

(106

)

 

 

(158

)

New TDR designation

 

 

557

 

 

 

30

 

 

 

587

 

 

 

52

 

 

 

 

 

 

52

 

Release TDR designation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer

 

 

1,835

 

 

 

(1,729

)

 

 

106

 

 

 

(69

)

 

 

69

 

 

 

 

Balance as of June 30, 2018

 

$

3,803

 

 

$

828

 

 

$

4,631

 

Balance as of June 30, 2019

 

$

4,046

 

 

$

1,440

 

 

$

5,486

 

 

Note 7:6: Other Real Estate Owned, net

The following table below detailspresents the number and carrying values of properties included in other real estate owned (“OREO”) as of the dates stated.

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

 

Number of

 

 

Carrying

 

 

Number of

 

 

Carrying

 

 

Number of

 

 

Carrying

 

 

Number of

 

 

Carrying

 

 

Properties

 

 

Value

 

 

Properties

 

 

Value

 

 

Properties

 

 

Value

 

 

Properties

 

 

Value

 

Residential

 

 

3

 

 

$

945

 

 

 

5

 

 

$

443

 

 

 

3

 

 

$

983

 

 

 

6

 

 

$

1,339

 

Land

 

 

20

 

 

 

2,020

 

 

 

20

 

 

 

3,223

 

 

 

16

 

 

 

1,729

 

 

 

17

 

 

 

1,741

 

Commercial properties

 

 

3

 

 

 

536

 

 

 

4

 

 

 

618

 

 

 

3

 

 

 

456

 

 

 

3

 

 

 

517

 

Total other real estate owned

 

 

26

 

 

 

3,501

 

 

 

29

 

 

 

4,284

 

Total other real estate owned, net

 

 

22

 

 

 

3,168

 

 

 

26

 

 

 

3,597

 

 

There was one $46 thousand collateralized consumer land loan andwere three collateralized residential mortgage loans totaling $230$349 thousand in the process of foreclosure as of June 30, 2018.2019.

21Note 7: Leases



On January 1, 2019, the Company adopted the requirements of ASU 2016-02. As part of the adoption of this accounting standard, the Company evaluated its population of existing real estate and equipment leases as of January 1, 2019. The purpose was to determine whether the Company’s existing contractual arrangements constitute a lease, or contains an embedded lease, which would be in scope under ASU 2016-02, and whether such leases would meet the requirements of an operating or financing lease under the new accounting standard. Based on this evaluation, the Company identified 16 operating leases for land, buildings, and equipment with remaining lease terms ranging from one to 10 years. Most of the Company’s leases include renewal options, with renewal terms extending the lease obligation up to as much as five years. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised as assessed at lease commencement. As of and for the six months ended June 30, 2019, the Company did not have any leases that met the standard definition of a finance lease nor did it engage in any sale-leaseback transactions, have any short-term leases, or have any sublease income.  

For operating leases, ROU assets and lease liabilities are recognized at the commencement date of the respective lease. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term and are measured as the present value of the lease payments over the lease term. ROU assets are measured as the amount of the lease liability adjusted for certain items such as prepaid lease payments, unamortized lease incentives, and unamortized direct costs. ROU assets are amortized on a straight-line basis less the periodic interest expense adjustment of the lease liability and the amortization is included in occupancy expense in the Company’s consolidated statements of operations. For the three and six months ended June 30, 2019, operating lease expense totaled $233 thousand and $460 thousand, respectively. The discount rate used for the present value calculations for lease liabilities was the rate implicit in the lease if determinable, and when the rate was not determinable, the Company used its incremental, collateralized borrowing rate with the FHLB for the period that most closely coincided with the respective lease term as of the commencement date of the lease.

During the first quarter of 2019, the Company commenced a new operating lease for the Richmond, Virginia office of the Financial Group, which resulted in the recognition of an operating ROU asset and lease liability of $826 thousand. During the second quarter of 2019, the Company commenced a new operating lease for a retail branch in Henrico County, Virginia, which resulted in the recognition of an operating ROU asset and lease liability of $478 thousand and $473 thousand, respectively.  

The following table presents the ROU assets and lease liabilities as of the date stated. ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.  

 

June 30, 2019

 

Operating lease right-of-use assets

$

4,410

 

 

 

 

 

Current operating lease liabilities

$

802

 

Noncurrent lease liabilities

 

3,930

 

Total operating lease liabilities

$

4,732

 

The following table presents the weighted average remaining lease term and discount rate associated with the Company’s operating leases as of the date stated.

June 30, 2019

Weighted average remaining lease term - operating leases

8 years

Weighted average discount rate - operating leases

3.11

%

The following table presents a maturity analysis of the Company’s operating lease liabilities for the five years ending subsequent to June 30, 2019 and in total thereafter.

2019

 

$

449

 

2020

 

 

944

 

2021

 

 

977

 

2022

 

 

601

 

2023

 

 

351

 

Thereafter

 

 

2,062

 

Total

 

 

5,384

 

Less interest

 

 

(652

)

Lease liability

 

$

4,732

 

The following table presents supplemental cash flow information related to the Company’s operating leases for the period stated.


 

For the Six Months Ended

 

 

June 30, 2019

 

Cash paid for amount included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

$

496

 

Right-of-use assets obtained in exchange for new operating lease liabilities

$

1,304

 

As part of the implementation of ASU 2016-02, the Company elected the following practical expedients. The Company elected to retain the operating lease classification for all of its existing leases as of January 1, 2019 under the former lease accounting standard. The Company elected not to reassess whether existing leases contained embedded lease arrangements or whether there were initial directs costs that should have been considered as part of the transition to ASU 2016-02. The Company also elected not to recognize an ROU asset and lease obligation for contracts with an initial term of twelve months or less. The expense associated with these short-term leases is included in noninterest expense in the consolidated statements of operations. To the extent that a lease arrangement includes both lease and non-lease components, the Company has elected not to account for these separately. Lastly, the Company has elected in its accounting policies to utilize a fair value threshold, such that a contract with an ROU asset or lease obligation below a minimum threshold of $7.5 thousand is excluded from the provisions of ASU 2016-02.

Note 8: Earnings per shareShare

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Basic earnings per share amounts are computed by dividing the net income (the numerator) by the weighted average number of common shares outstanding (the denominator). Diluted earnings per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase the earnings per common share. For both computations, the weighted average number of employee stock ownership plan (“ESOP”) shares not committed to be released to participant accounts purchased by the ESOP are not assumed to be outstanding. The weighted average ESOP shares excluded from the computation were 204,675 and 207,462 for the three and six months ended June 30, 2019, respectively. The weighted average ESOP shares excluded from the computation were 154,410 and 157,885 for the three and six months ended June 30, 2018, respectively. The weighted average ESOP shares excluded from the computation were 140,542 and 70,267 for the three and six months ended June 30, 2017, respectively. For the three months ended June 30, 20182019 and 2017,2018, options on 96,41576,784 and 91,36896,415 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive. For the six months ended June 30, 20182019 and 2017,2018, options on 96,41576,784 and 91,36896,415 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive.

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

946

 

 

$

557

 

 

$

2,070

 

 

$

380

 

 

$

1,723

 

 

$

946

 

 

$

3,215

 

 

$

2,070

 

Weighted average shares outstanding, basic

 

 

13,059,604

 

 

 

9,233,615

 

 

 

13,049,142

 

 

 

7,017,907

 

 

 

13,059,824

 

 

 

13,059,604

 

 

 

13,030,528

 

 

 

13,049,142

 

Dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

62,081

 

 

 

7,181

 

 

 

67,484

 

 

 

66,523

 

 

 

32,425

 

 

 

62,081

 

 

 

33,189

 

 

 

67,484

 

Restricted shares

 

 

4,734

 

 

 

 

 

 

5,021

 

 

 

 

Restricted stock

 

 

12,694

 

 

 

4,734

 

 

 

7,087

 

 

 

5,021

 

Weighted average shares outstanding, dilutive

 

 

13,126,419

 

 

 

9,240,796

 

 

 

13,121,647

 

 

 

7,084,430

 

 

 

13,104,943

 

 

 

13,126,419

 

 

 

13,070,804

 

 

 

13,121,647

 

Basic and diluted earnings per share

 

$

0.07

 

 

$

0.06

 

 

$

0.16

 

 

$

0.05

 

 

$

0.13

 

 

$

0.07

 

 

$

0.25

 

 

$

0.16

 

 

Note 9: Employee Benefit PlansBorrowings

The Company has a non-contributory, cash balance pension plan for employees who were vested in the plan as of December 31, 2012, when it was frozen (i.e., curtailed). Each participant’s account balance grows based on monthly interest credits. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act (ERISA).

The Company also sponsored a post-retirement benefit plan covering retirees who were age 55 with 10 years of service or age 65 with five years of service prior to March 1, 2018, when the plan was curtailed. The Company recognized a gain on the curtailment of the post-retirement plan of $352 thousand at March 1, 2018, which is included in the consolidated statements of operations for the six months ended June 30, 2018. The post-retirement benefit plan provides coverage toward a retiree’s eligible medical and life insurance benefits expenses. The plan is unfunded and funded as benefits are paid.

Note 10: Borrowings

FHLB Borrowings

As of June 30, 20182019 and December 31, 2017,2018, the Bank had $70.0 million and $100.0 million of outstanding FHLB borrowings, consisting of two advances.and four advances, respectively. Advances on the FHLB linesline are secured by a blanket lien on qualified one-to-four family real estate, commercial real estate, and multifamily residential loans. Immediate available credit, as of June 30, 2018,2019, was $172.2$186.7 million against a total line of credit of $248.2$274.7 million. As of June 30, 2019, the Bank had $18.0 million of letters of credit issued by the FHLB for the benefit of the Virginia Department of the Treasury as collateral for public deposits held by the Bank to comply with the Security of Public Deposits Act. The $18.0 million is not an outstanding borrowing, as of June 30, 2019, but does reduce the available credit under the FHLB credit line.


FurtherThe following table presents information regarding the two advances outstanding as of June 30, 2018 are shown in the following table.2019.

 

 

 

 

 

 

 

 

 

 

 

 

Maturity

 

 

 

 

 

 

 

Stated

 

 

Maturity

 

Balance

 

 

Originated

 

Interest Rate

 

 

Date

 

Balance

 

 

Originated

 

Interest Rate

 

 

Date

Adjustable rate hybrid

 

$

10,000

 

 

4/12/2013

 

 

4.72

%

 

4/13/2020

 

$

10,000

 

 

4/12/2013

 

 

4.98

%

 

4/13/2020

Fixed rate credit

 

 

60,000

 

 

6/4/2018

 

 

1.97

%

 

7/3/2018

 

 

60,000

 

 

6/3/2019

 

 

2.48

%

 

7/3/2019

Total FHLB borrowings

 

$

70,000

 

 

 

 

 

3.35

%

 

 

 

$

70,000

 

 

 

 

 

 

 

 

 

 

Subordinated Notes

On May 28, 2015, the Company entered into a purchase agreement with 29 accredited investors under which the Company issued an aggregate of $7.0 million of subordinated notes (the “notes”) to the accredited investors. The notes have a maturity date of May 28, 2025 and bear interest, payable on the first of March and September of each year, at a fixed interest rate of 6.50% per year. The notes are not convertible into common stock or preferred stock and are not callable by the holders. The Company has the right to redeem the notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020, but in all cases in a

22


principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a note may declare the principal amount of the notes to be due and immediately payable. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness. The notes qualify as Tier 2 capital for regulatory reporting. The aggregate carrying value of the notes, including capitalized debt issuance costs, was $6.9 million at bothas of June 30, 20182019 and December 31, 2017.2018. For the three and six months ended June 30, 20182019 and 2017,2018, the effective interest rate on the notes was 6.85%6.84% and 6.93%6.85%, respectively. For the six months ended June 30, 2018 and 2017, the effective interest rate on the notes was 6.85% and 6.87%, respectively.

ESOP Debt

The aggregate carrying value of debt secured by shares of Company stock, issued and outstanding, in the Company’s ESOP was $1.0$1.7 million atas of June 30, 20182019 and $1.1 million at December 31, 20172018 and is included in other liabilities on the consolidated balance sheets. The debt is comprised of fivefour fixed rate-amortizingrate amortizing notes, fourthree of which carry an interest rate of 3.25% and one that carries an interest rate of 4.50% with maturity dates ranging from March 1, 20192025 to December 31, 2027.2027, and one variable rate amortizing note with a maturity date of June 14, 2024. Shares that collateralize these loans are not allocated to ESOP participants’ accounts.

Note 11:10: Fair Value Measurements

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance (ASC 820, Fair Value Measurements (“ASC 820”)) clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous market.

Authoritative accounting guidance

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

 

 

 

Level 1 –

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

 

Level 2 –

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

 

Level 3 –

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Available-for-sale securitiessecurities:: Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases, where

23


there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Company engages a third partythird-party to determine the fair value of its available-for-sale securities.

Rabbi trust: The Company has a rabbi trust for the benefit of participants in the company’s deferred compensation benefit plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets are included in other assets on the consolidated balance sheets.

Mortgage servicing rights (“MSR”MSRs”): The Company currently owns MSRs from two residential loan portfolios, one serviced for Fannie Mae (“FNMA”) and one serviced for Freddie Mac (“FHLMC”).Mac. The MSRs for the portfolios serviced for FNMA and FHLMC are recorded at fair value on a recurring basis, with changes in fair value recorded in the results of operations.

A

The Company engages a third-party to determine the fair value of MSRs. The third-party employs a model is used to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool, and applies a discount rate to each pool. Loans are segregated into 1412 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Monthly service costs were assumed to be $6.50 per loan as of June 30, 20182019 and as of December 31, 2017.2018. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining loan balance. The average PSA speed assumption in the fair value model is 129%181% and 150%133% as of June 30, 20182019 and December 31, 2017,2018, respectively. A discount rate of 12.5% and 13.0% was then applied to each pool as of June 30, 20182019 and as of December 31, 2017,

23


respectively.2018. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSRs are classified as Level 3.

The following table presentstables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the dates stated.

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2018 Using

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2019 Using

 

 

Balance as of June 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Balance as of June 30, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies and mortgage backed

securities

 

$

46,327

 

 

$

 

 

$

46,327

 

 

$

 

 

$

51,867

 

 

$

 

 

$

51,867

 

 

$

 

State and municipal obligations

 

 

20,891

 

 

 

 

 

 

20,891

 

 

 

 

 

 

17,054

 

 

 

 

 

 

17,054

 

 

 

 

Corporate bonds

 

 

7,104

 

 

 

 

 

 

 

 

 

7,104

 

 

 

12,248

 

 

 

 

 

 

6,537

 

 

 

5,711

 

Total available for sale securities

 

$

74,322

 

 

$

 

 

$

67,218

 

 

$

7,104

 

Total available-for-sale securities

 

$

81,169

 

 

$

 

 

$

75,458

 

 

$

5,711

 

Mortgage servicing rights

 

$

977

 

 

$

 

 

$

 

 

$

977

 

 

$

916

 

 

$

 

 

$

 

 

$

916

 

Rabbi trust assets

 

$

1,053

 

 

$

1,053

 

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2017 Using

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2018 Using

 

 

Balance as of December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Balance as of December 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies and mortgage backed securities

 

$

49,283

 

 

$

 

 

$

49,283

 

 

$

 

 

$

49,882

 

 

$

 

 

$

49,882

 

 

$

 

State and municipal obligations

 

 

21,153

 

 

 

 

 

 

21,153

 

 

 

 

 

 

20,217

 

 

 

 

 

 

20,217

 

 

 

 

Corporate bonds

 

 

6,717

 

 

 

 

 

 

 

 

 

6,717

 

 

 

12,133

 

 

 

 

 

 

8,462

 

 

 

3,671

 

Total available for sale securities

 

$

77,153

 

 

$

 

 

$

70,436

 

 

$

6,717

 

Total available-for-sale securities

 

$

82,232

 

 

$

 

 

$

78,561

 

 

$

3,671

 

Mortgage servicing rights

 

$

999

 

 

$

 

 

$

 

 

$

999

 

 

$

977

 

 

$

 

 

$

 

 

$

977

 

Rabbi trust assets

 

$

972

 

 

$

972

 

 

$

 

 

$

 

 

The reconciliation of itemsfollowing table presents the change in financial assets valued using Level 3 inputs is as follows.for the periods stated.

 

 

MSR

 

 

Corporate

Bonds

 

 

MSRs

 

 

Corporate

Bonds

 

Balance December 31, 2017

 

$

999

 

 

$

6,717

 

Balance as of January 1, 2019

 

$

977

 

 

$

3,671

 

Purchases

 

 

 

 

 

400

 

 

 

 

 

 

 

Transfer from level 2 to level 3

 

 

 

 

 

2,044

 

Fair value adjustments

 

 

(22

)

 

 

(13

)

 

 

(61

)

 

 

(4

)

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2018

 

$

977

 

 

$

7,104

 

Balance as of June 30, 2019

 

$

916

 

 

$

5,711

 


The $2.0 million transfer from level 2 to level 3 fair value for corporate bonds was attributable to a lack of a third-party pricing valuation as of June 30, 2019.

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement will not be collected.agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral if any, less estimated costs to sell.sell, if the loan is collateral-dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the vast majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

24


Other Real Estate Owned:Owned, net: OREO is measured at fair value less estimated costs to sell, generally based on an appraisal conducted by an independent, licensed appraiser.appraiser, or using other methods such as a brokered price opinion of a third-party real estate agent. If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. Fair value adjustments, if any, are recorded in the period incurred and included in other noninterest expense on the consolidated statements of operations.

The following table summarizestables present the Company’s assets that were measured at fair value on a non-recurringnonrecurring basis as of the dates stated.

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2018 Using

 

 

 

Balance as of June 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans

 

$

4,657

 

 

$

 

 

$

 

 

$

4,657

 

Other real estate owned

 

 

3,501

 

 

 

 

 

 

 

 

 

3,501

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2019 Using

 

 

 

Balance as of June 30, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

4,229

 

 

$

 

 

$

 

 

$

4,229

 

Other real estate owned, net

 

 

3,168

 

 

 

 

 

 

 

 

 

3,168

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2017 Using

 

 

 

Balance as of December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans

 

$

3,491

 

 

$

 

 

$

 

 

$

3,491

 

Other real estate owned

 

 

4,284

 

 

 

 

 

 

 

 

 

4,284

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2018 Using

 

 

 

Balance as of December 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

4,700

 

 

$

 

 

$

 

 

$

4,700

 

Other real estate owned, net

 

 

3,597

 

 

 

 

 

 

 

 

 

3,597

 

 

The following table displaystables present quantitative information about Level 3 Fair Value Measurementsfair value measurements as of June 30, 2018.the dates stated.

 

 

 

Balance as of June 30, 2018

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

Impaired loans

 

$

4,657

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

0%-30% (18%)

50%-100% (70%)

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

5%-6% (6%)

Other real estate owned

 

 

3,501

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

3%-13% (4%)

4%-100% (12%)

 

 

Balance as of June 30, 2019

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

Impaired loans, net

 

$

4,229

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

20%-25% (20%)

100% (100%)

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

5%-7% (6%)

Other real estate owned, net

 

 

3,168

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

6%-23% (9%)

9%-100% (21%)

 

The following table displays quantitative information about Level 3 Fair Value Measurements as of December 31, 2017.

 

 

Balance as of December 31, 2017

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

Impaired loans

 

$

3,491

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

6%-20% (16%)

50%-90% (65%)

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

5%-6% (6%)

Other real estate owned

 

 

4,284

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

3%-13% (8%)

10%-100% (16%)

 

 

Balance as of December 31, 2018

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

Impaired loans, net

 

$

4,700

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

15%-20% (16%)

100% (100%)

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

5%-7% (6%)

Other real estate owned, net

 

 

3,597

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

5%-19% (8%)

9%-100% (28%)

In 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), which requires public companies to use the exit price when measuring fair value of financial instruments measured at amortized cost. The Company engaged a third party to assist with the prospective measurement of the fair value of certain assets and liabilities measured on a nonrecurring basis. The fair values as of June 30, 2018 below were calculated using the exit prices, as promulgated by this standard, while the fair values as of December 31, 2017 were calculated using a discounted cash flows method or other methods; therefore, the tables below are not comparable.


The carrying values of cash and due from banks, interest-bearinginterest-earning deposits, certificates of deposit, federal funds sold or purchased, accrued interest receivable, loans held for sale,noninterest-bearing deposits, savings and noninterest-bearinginterest-bearing deposits, and securities sold under repurchase agreements are payable on demand or are of such short duration that carrying value approximates market value.value (Level 1).

The carrying values of certificates of deposit, loans held for sale, and accrued interest receivable are payable on demand or are of such short duration that carrying value approximates market value (Level 2).

The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer.issuer (Level 3).

25


The fair value of performing loans is estimated by discounting the future cash flows using two sets of data sources. First, recent originations occurring over the prior twelve months were evaluated, and second, market data showing originations over the prior three months was evaluated. The selected rate was the greater of the two sources. For all loans other than a selective consumer loan portfolio, credit loss severity rates were calculated using the probability of default and the loss given default percentages derived from market data. For the consumer loan portfolio, historical delinquency data was obtained by the servicer of the portfolio. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does consider the lack of liquidity and uncertainty in the market that might affect the valuation.valuation (Level 3).

Time deposits are presented at estimated fair value by discounting the future cash flows using recent issuance rates over the prior three months and a market rate analysis of recent offering rates.rates (Level 3).

The fair value of the Company’s subordinated notes is estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size.size (Level 3).

The fair value of the FHLB advances is estimated by discounting the future cash flows using current interest rates offered for similar advances.advances (Level 2).

The fair value of commitments

Commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date. At June 30, 2018 and December 31, 2017, the fair value of loan commitments and standby letters of credit was immaterial,are generally not sold or traded. The estimated fair values of off-balance sheet credit commitments, including standby letters of credit and thereforeguarantees written, are not included inreadily available due to the table above.lack of cost-effective and reliable measurement methods for these instruments.

 

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


The following table summarizestables summarize the Company’s financial assets and liabilities at carrying values and estimated fair values on a nonrecurring basis as of the dates stated.

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2018 Using

 

 

Carrying value as of

 

 

Fair Value as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of March 31, 2019 Using

 

 

June 30, 2018

 

 

June 30, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

June 30, 2019

 

 

June 30, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,319

 

 

$

8,319

 

 

$

8,319

 

 

$

 

 

$

 

 

$

8,139

 

 

$

8,139

 

 

$

8,139

 

 

$

 

 

$

 

Interest-bearing deposits

 

 

28,263

 

 

 

28,263

 

 

 

28,263

 

 

 

 

 

 

 

Interest-earning deposits

 

 

15,869

 

 

 

15,869

 

 

 

15,869

 

 

 

 

 

 

 

Federal funds sold

 

 

596

 

 

 

596

 

 

 

596

 

 

 

 

 

 

 

Certificates of deposit

 

 

3,224

 

 

 

3,224

 

 

 

 

 

 

3,224

 

 

 

 

 

 

3,498

 

 

 

3,498

 

 

 

 

 

 

3,498

 

 

 

 

Federal funds sold

 

 

1,944

 

 

 

1,944

 

 

 

1,944

 

 

 

 

 

 

 

Restricted securities

 

 

6,190

 

 

 

6,190

 

 

 

 

 

 

6,190

 

 

 

 

 

 

6,769

 

 

 

6,769

 

 

 

 

 

 

 

 

 

6,769

 

Loans receivable, net

 

 

794,443

 

 

 

781,194

 

 

 

 

 

 

 

 

 

781,194

 

 

 

909,913

 

 

 

898,163

 

 

 

 

 

 

 

 

 

898,163

 

Loans held for sale

 

 

669

 

 

 

669

 

 

 

 

 

 

669

 

 

 

 

 

 

593

 

 

 

593

 

 

 

 

 

 

593

 

 

 

 

Accrued interest receivable

 

 

2,954

 

 

 

2,954

 

 

 

 

 

 

 

 

 

2,954

 

 

 

3,191

 

 

 

3,191

 

 

 

 

 

 

3,191

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

108,943

 

 

 

108,943

 

 

 

108,943

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

116,229

 

 

 

116,229

 

 

 

116,229

 

 

 

 

 

 

 

Savings and interest-bearing demand deposits

 

 

296,206

 

 

 

296,206

 

 

 

 

 

 

296,206

 

 

 

 

 

 

374,175

 

 

 

374,175

 

 

 

374,175

 

 

 

 

 

 

 

Time deposits

 

 

369,917

 

 

 

370,430

 

 

 

 

 

 

370,430

 

 

 

 

 

 

385,218

 

 

 

379,095

 

 

 

 

 

 

 

 

 

379,095

 

Securities sold under repurchase agreements

 

 

7,008

 

 

 

7,008

 

 

 

 

 

 

7,008

 

 

 

 

 

 

6,983

 

 

 

6,983

 

 

 

6,983

 

 

 

 

 

 

 

FHLB advances

 

 

70,000

 

 

 

69,634

 

 

 

 

 

 

69,634

 

 

 

 

 

 

70,000

 

 

 

69,828

 

 

 

 

 

 

69,828

 

 

 

 

Subordinated notes

 

 

6,885

 

 

 

7,049

 

 

 

 

 

 

7,049

 

 

 

 

Subordinated notes, net

 

 

6,902

 

 

 

7,033

 

 

 

 

 

 

 

 

 

7,033

 


 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2017 Using

 

 

Carrying value as of

 

 

Fair Value as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of December 31, 2018 Using

 

 

December 31, 2017

 

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

December 31, 2018

 

 

December 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,396

 

 

$

9,396

 

 

$

9,396

 

 

$

 

 

$

 

 

$

7,685

 

 

$

7,685

 

 

$

7,685

 

 

$

 

 

$

 

Interest-bearing deposits

 

 

41,971

 

 

 

41,971

 

 

 

41,971

 

 

 

 

 

 

 

Interest-earning deposits

 

 

18,981

 

 

 

18,981

 

 

 

18,981

 

 

 

 

 

 

 

Certificates of deposit

 

 

3,224

 

 

 

3,224

 

 

 

 

 

 

3,224

 

 

 

 

 

 

3,746

 

 

 

3,746

 

 

 

 

 

 

3,746

 

 

 

 

Federal funds sold

 

 

6,961

 

 

 

6,961

 

 

 

6,961

 

 

 

 

 

 

 

 

 

625

 

 

 

625

 

 

 

625

 

 

 

 

 

 

 

Restricted securities

 

 

5,787

 

 

 

5,787

 

 

 

 

 

 

5,787

 

 

 

 

 

 

7,600

 

 

 

7,600

 

 

 

 

 

 

 

 

 

7,600

 

Loans receivable, net

 

 

758,726

 

 

 

774,099

 

 

 

 

 

 

 

 

 

774,099

 

 

 

894,191

 

 

 

877,114

 

 

 

 

 

 

 

 

 

877,114

 

Loans held for sale

 

 

1,651

 

 

 

1,651

 

 

 

 

 

 

1,651

 

 

 

 

 

 

368

 

 

 

368

 

 

 

 

 

 

368

 

 

 

 

Accrued interest receivable

 

 

3,194

 

 

 

3,194

 

 

 

 

 

 

 

 

 

3,194

 

 

 

3,172

 

 

 

3,172

 

 

 

 

 

 

3,172

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

103,037

 

 

 

103,037

 

 

 

103,037

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

114,122

 

 

 

114,122

 

 

 

114,122

 

 

 

 

 

 

 

Savings and interest-bearing demand deposits

 

 

299,820

 

 

 

299,820

 

 

 

 

 

 

299,820

 

 

 

 

 

 

359,400

 

 

 

359,400

 

 

 

359,400

 

 

 

 

 

 

 

Time deposits

 

 

358,989

 

 

 

356,450

 

 

 

 

 

 

-

 

 

 

356,450

 

 

 

368,670

 

 

 

369,347

 

 

 

 

 

 

 

 

 

369,347

 

Securities sold under repurchase agreements

 

 

9,498

 

 

 

9,498

 

 

 

 

 

 

9,498

 

 

 

 

 

 

6,089

 

 

 

6,089

 

 

 

6,089

 

 

 

 

 

 

 

FHLB advances

 

 

70,000

 

 

 

70,486

 

 

 

 

 

 

70,486

 

 

 

 

 

 

100,000

 

 

 

99,727

 

 

 

 

 

 

99,727

 

 

 

 

Subordinated notes

 

 

6,877

 

 

 

7,000

 

 

 

 

 

 

 

 

 

7,000

 

Subordinated notes, net

 

 

6,893

 

 

 

7,046

 

 

 

 

 

 

 

 

 

7,046

 

 

Note 12:11: Changes in Accumulated Other Comprehensive Income (Loss), net

The components of accumulated other comprehensive income (loss), net of deferred taxes, are shownpresented in the following tables for the periodsperiod presented.

 

 

 

For the Three Months Ended  June 30, 2018

 

 

 

Net Unrealized

Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Balance as of April 1, 2018

 

$

(1,433

)

 

$

(667

)

 

$

(2,100

)

Change in net unrealized holding loss on available for sale

   securities, net of tax benefit of $57

 

 

(215

)

 

 

 

 

 

(215

)

Balance as of June 30, 2018

 

$

(1,648

)

 

$

(667

)

 

$

(2,315

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2018

 

 

 

Net Unrealized

Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Balance as of January 1, 2018

 

$

(489

)

 

$

(667

)

 

$

(1,156

)

Change in net unrealized holding loss on available for sale

   securities, net of tax benefit of $308

 

 

(1,159

)

 

 

 

 

 

(1,159

)

Balance as of June 30, 2018

 

$

(1,648

)

 

$

(667

)

 

$

(2,315

)

27


 

 

For the Three Months Ended June 30, 2019

 

 

 

Net Unrealized Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss), net

 

Balance as of April 1, 2019

 

$

(446

)

 

$

(75

)

 

$

(521

)

Change in net unrealized holding gain on available-for-sale

   securities, net of deferred tax expense of $167

 

 

628

 

 

 

 

 

 

628

 

Balance as of June 30, 2019

 

$

182

 

 

$

(75

)

 

$

107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019

 

 

 

Net Unrealized

Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss), net

 

Balance as of January 1, 2019

 

$

(1,252

)

 

$

(75

)

 

$

(1,327

)

Change in net unrealized holding gain on available-for-sale

   securities, net of deferred tax expense of $382

 

 

1,434

 

 

 

 

 

 

1,434

 

Balance as of June 30, 2019

 

$

182

 

 

$

(75

)

 

$

107

 

 

 

For the Three Months Ended June 30, 2018

 

 

 

Net Unrealized

Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Balance as of April 1, 2018

 

$

(1,433

)

 

$

(667

)

 

$

(2,100

)

Change in net unrealized holding loss on available-for-sale

   securities, net of tax benefit of $57

 

 

(215

)

 

 

 

 

 

(215

)

Balance as of June 30, 2018

 

$

(1,648

)

 

$

(667

)

 

$

(2,315

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

Net Unrealized

Gains (Losses)

on Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Balance as of January 1, 2018

 

$

(489

)

 

$

(667

)

 

$

(1,156

)

Change in net unrealized holding loss on available-for-sale

   securities, net of tax benefit of $308

 

 

(1,159

)

 

 

 

 

 

(1,159

)

Balance as of June 30, 2018

 

$

(1,648

)

 

$

(667

)

 

$

(2,315

)

 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. (the “Company”), the holding company for Virginia Commonwealth Bank (the “Bank”) and VCB Financial Group, Inc. (the “Financial Group”). This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“the 20172018 (the “2018 Form 10-K”).

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. These forward-looking statements include statements about expectations regarding the merger between the Company and Virginia BanCorp Inc. (“Virginia BanCorp”), the Company’s plans, obligations, expectations and intentions, and other statements that are not historical facts. Words such as “anticipates,” “believes,” “intends,” “should,” “expects,” “will,” and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, disruptions to customer and employee relationships and business operations caused by the merger; the ability to implement integration plans associated with the merger, which integration may be more difficult, time-consuming or costly than expected; the ability to achieve the cost savings and synergies contemplated by the merger within the expected timeframe, or at all;to: changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System;System (the “Federal Reserve”); the quality or composition of the loan orand investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company’s market area; accounting principles, policies, and guidelines; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; and other factors detailed in the Company’s publicly filed documents, including the factors described in Item 1A., “Risk Factors,” in the 20172018 Form 10-K. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

EXECUTIVE SUMMARY

MERGER WITH VIRGINIA BANCORP

On April 1, 2017, the Company and Virginia BanCorp, a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank, completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp (the “Merger”). The Company was the surviving corporation in the Merger, and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the Merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $42.2 million at the time of closing. As of the completion of the Merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company. After the Merger, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, a wholly-owned subsidiary of the Company, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank (the “Bank”).

Pursuant to the Merger, the Company acquired approximately $329.1 million in assets, including $266.1 million of loans, and assumed approximately $294.5 million in liabilities. Merger related costs incurred by the Company were $363 thousand and $985 thousand for the first six months of 2018 and 2017, respectively.

The financial information for the periods ended June 30, 2017 and June 30, 2018 presented herein reflects the combined operations of the business combination since the effective time of the Merger, April 1, 2017.GENERAL

All dollar amounts included in the tables of this discussion are in thousands, except per share data, unless otherwise stated.

GENERAL There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2018 Form 10-K.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Changes in the volume and/or mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, the level of noninterest-bearing deposits, and the volume of nonperforming assets have an effect on net interest income, net interest margin, and net income.

28


OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net income for the three months ended June 30, 2019 and 2018 was $1.7 million and 2017 was $946 thousand and $557 thousand, respectively, an increase of $389$777 thousand. Diluted earnings per share was $0.13 for the three months ended June 30, 2019 compared to $0.07 for the three months ended June 30, 2018 compared to $0.06 for the three months ended June 30, 2017.2018. Net income for the six months ended June 30, 2019 and 2018 was $3.2 million and 2017 was $2.1 million, and $380 thousand, respectively, an increase of $1.7$1.1 million. Diluted earnings per share was $0.25 for the six months ended June 30, 2019 compared to $0.16 for the six months ended June 30, 2018 compared to $0.05 for the six months ended June 30, 2017.2018.

Income before income taxes was $1.1$2.1 million and $811 thousand$1.1 million for the three months ended June 30, 2019 and 2018, and 2017, respectively, which included $0 and $685 thousandan increase of merger related costs, respectively.$1.0 million. Income before income taxes was $2.5$3.9 million and $513 thousand$2.5 million for the six months ended June 30, 2019 and 2018, and 2017, respectively, whichan increase of $1.8 million. The 2018 period included $363 thousand and $985 thousand of merger relatedmerger-related costs, respectively.while there were no merger-related expenses in the 2019 period.

Return on average assets (annualized) increased to 0.38%0.62% and 0.43%0.59% for the three and six months ended June 30, 2018,2019, respectively, from 0.26%0.38% and 0.12%0.43% for the comparable 20172018 periods.

Return on average equity (annualized) increased to 3.28%5.72% and 3.63%5.39% for the three and six months ended June 30, 2018,2019, respectively, from 2.65%3.28% and 1.21%3.63% for the comparable 20172018 periods.

Total assets increased $12.7$13.6 million to $983.2 million$1.09 billion as of June 30, 2019 from $970.6 million in the first six months$1.08 billion as of December 31, 2018.

Net loans increased by $15.7 million, an annualized growth rate of over 3%, during the first half of 2019. Excluding the payoff of approximately $19.5 million in the first half of 2019 of purchased portfolio loans, including those acquired in

29


Gross loans increased by $35.1 million, or 4.6% (over 9% annualized), during the first six months of 2018. Excluding the pay down of approximately $38 million in the first six months of 2018 of purchased portfolio loans, including those acquired in the Merger, gross loan growth on an annualized basis was approximately 19%.

the merger with Virginia BanCorp, Inc. on April 1, 2017 (the “Merger”), net loan growth on an annualized basis was nearly 8% for the six months ended June 30, 2019.

Total deposits increased by $13.2$33.4 million to $775.1$875.6 million as of June 30, 2019 from $761.8$842.2 million in the first six monthsas of 2018.December 31, 2018, an annualized growth rate of over 7%.

Asset quality improved during the first half of 2018 with theThe ratio of nonperforming assets to total assets decliningdecreased 10 basis points to 0.71% as of June 30, 2018 compared to 1.12%2019 from 0.81% as of December 31, 2017.2018.

Capital levels and regulatory capital ratios for the Bank were above regulatory minimums for well-capitalized banks.banks as of June 30, 2019, with a total capital ratio and tier 1 leverage ratio of 12.82% and 10.14%, respectively.

29


RESULTS OF OPERATIONS

NET INTEREST INCOME AND NET INTEREST MARGIN

 

The following table presents average interest-earning assets and interest-bearing liabilities, tax-equivalenttaxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, net interest margin (“NIM”), and net interest spread, as of and for the periods stated. Yields and costs are annualized.

 

 

Average Balances, Income and Expense, Yields and Rates

 

 

Average Balances, Income and Expense, Yields and Rates

 

 

As of and for the Three Months Ended June 30,

 

 

Three Months Ended

 

 

Three Months Ended

 

 

2019

 

 

2018

 

 

2019 Compared to 2018

 

 

June 30, 2018

 

 

June 30, 2017

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Income/ Expense

 

 

Variance Attributable to (8)

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

 

Balance

 

 

Expense

 

 

Cost

 

 

Balance

 

 

Expense

 

 

Cost

 

 

Variance

 

 

Rate

 

 

Volume

 

INTEREST-EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

61,309

 

 

$

497

 

 

 

3.24

%

 

$

44,390

 

 

$

348

 

 

 

3.13

%

 

$

69,617

 

 

$

577

 

 

 

3.32

%

 

$

61,309

 

 

$

497

 

 

 

3.24

%

 

$

80

 

 

$

13

 

 

$

67

 

Tax-exempt securities (1)

 

 

19,163

 

 

 

148

 

 

 

3.09

%

 

 

19,235

 

 

 

173

 

 

 

3.60

%

 

 

17,001

 

 

 

123

 

 

��

2.90

%

 

 

19,163

 

 

 

148

 

 

 

3.09

%

 

 

(25

)

 

 

(9

)

 

 

(17

)

Total securities

 

 

80,472

 

 

 

645

 

 

 

3.21

%

 

 

63,625

 

 

 

521

 

 

 

3.27

%

 

 

86,618

 

 

 

700

 

 

 

3.24

%

 

 

80,472

 

 

 

645

 

 

 

3.21

%

 

 

55

 

 

 

4

 

 

 

50

 

Gross loans (2) (3)

 

 

798,353

 

 

 

9,745

 

 

 

4.88

%

 

 

684,629

 

 

 

8,326

 

 

 

4.86

%

 

 

917,474

 

 

 

11,458

 

 

 

5.01

%

 

 

798,353

 

 

 

9,745

 

 

 

4.88

%

 

 

1,713

 

 

 

265

 

 

 

1,448

 

Interest-bearing deposits and federal funds sold

 

 

31,437

 

 

 

131

 

 

 

1.67

%

 

 

38,393

 

 

 

86

 

 

 

0.90

%

Interest-earning deposits and federal funds sold

 

 

29,719

 

 

 

170

 

 

 

2.29

%

 

 

31,437

 

 

 

131

 

 

 

1.67

%

 

 

39

 

 

 

46

 

 

 

(7

)

Certificates of deposits

 

 

3,224

 

 

 

18

 

 

 

2.23

%

 

 

3,426

 

 

 

18

 

 

 

2.09

%

 

 

3,716

 

 

 

19

 

 

 

2.05

%

 

 

3,224

 

 

 

18

 

 

 

2.23

%

 

 

1

 

 

 

(2

)

 

 

3

 

Total interest-earning assets

 

$

913,486

 

 

$

10,539

 

 

 

4.61

%

 

$

790,073

 

 

$

8,951

 

 

 

4.53

%

 

 

1,037,527

 

 

 

12,347

 

 

 

4.77

%

 

 

913,486

 

 

 

10,539

 

 

 

4.61

%

 

$

1,808

 

 

$

314

 

 

$

1,494

 

Noninterest-earning assets

 

 

67,884

 

 

 

 

 

 

 

 

 

 

 

75,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

 

$

1,105,411

 

 

 

 

 

 

 

 

 

 

$

988,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

62,739

 

 

$

49

 

 

 

0.31

%

 

$

65,835

 

 

$

33

 

 

 

0.20

%

 

$

57,670

 

 

$

45

 

 

 

0.31

%

 

$

62,739

 

 

$

49

 

 

 

0.31

%

 

$

(4

)

 

$

(0

)

 

$

(4

)

Demand deposits

 

 

79,776

 

 

 

42

 

 

 

0.21

%

 

 

91,919

 

 

 

40

 

 

 

0.17

%

 

 

74,045

 

 

 

35

 

 

 

0.19

%

 

 

79,776

 

 

 

42

 

 

 

0.21

%

 

 

(7

)

 

 

(4

)

 

 

(3

)

Time deposits (4)

 

 

370,350

 

 

 

1,353

 

 

 

1.47

%

 

 

288,324

 

 

 

813

 

 

 

1.13

%

 

 

383,783

 

 

 

2,048

 

 

 

2.14

%

 

 

370,350

 

 

 

1,353

 

 

 

1.47

%

 

 

695

 

 

 

646

 

 

 

49

 

Money market deposits

 

 

153,398

 

 

 

352

 

 

 

0.92

%

 

 

128,640

 

 

 

191

 

 

 

0.59

%

 

 

240,831

 

 

 

960

 

 

 

1.60

%

 

 

153,398

 

 

 

352

 

 

 

0.92

%

 

 

608

 

 

 

407

 

 

 

201

 

Total deposits

 

 

666,263

 

 

 

1,796

 

 

 

1.08

%

 

 

574,718

 

 

 

1,077

 

 

 

0.75

%

 

 

756,329

 

 

 

3,088

 

 

 

1.64

%

 

 

666,263

 

 

 

1,796

 

 

 

1.08

%

 

 

1,292

 

 

 

1,049

 

 

 

243

 

Federal funds purchased

 

 

 

 

 

 

 

 

0.00

%

 

 

 

 

 

 

 

 

0.00

%

Securities sold under repurchase agreements

 

 

6,402

 

 

 

4

 

 

 

0.25

%

 

 

9,520

 

 

 

4

 

 

 

0.17

%

 

 

6,594

 

 

 

4

 

 

 

0.24

%

 

 

6,402

 

 

 

4

 

 

 

0.25

%

 

 

 

 

 

 

 

 

 

Subordinated notes and ESOP debt

 

 

7,969

 

 

 

128

 

 

 

6.42

%

 

 

6,867

 

 

 

119

 

 

 

6.95

%

 

 

8,586

 

 

 

138

 

 

 

6.45

%

 

 

7,969

 

 

 

128

 

 

 

6.42

%

 

 

10

 

 

 

 

 

 

10

 

FHLB advances

 

 

66,593

 

 

 

386

 

 

 

2.32

%

 

 

76,630

 

 

 

248

 

 

 

1.29

%

 

 

85,846

 

 

 

614

 

 

 

2.87

%

 

 

66,593

 

 

 

386

 

 

 

2.32

%

 

 

228

 

 

 

116

 

 

 

112

 

Total interest-bearing liabilities

 

$

747,227

 

 

$

2,314

 

 

 

1.24

%

 

$

667,735

 

 

$

1,448

 

 

 

0.87

%

 

 

857,355

 

 

 

3,844

 

 

 

1.80

%

 

 

747,227

 

 

 

2,314

 

 

 

1.24

%

 

$

1,530

 

 

$

1,166

 

 

$

364

 

Net interest income and net interest margin (5)

 

 

 

 

 

$

8,225

 

 

 

3.60

%

 

 

 

 

 

$

7,503

 

 

 

3.80

%

Noninterest-bearing deposits

 

$

107,992

 

 

 

 

 

 

 

 

 

 

$

95,264

 

 

 

 

 

 

 

 

 

 

 

115,547

 

 

 

 

 

 

 

 

 

 

 

107,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of funds

 

 

 

 

 

 

 

 

 

 

1.08

%

 

 

 

 

 

 

 

 

 

 

0.76

%

Net interest spread (6)

 

 

 

 

 

 

 

 

 

 

3.38

%

 

 

 

 

 

 

 

 

 

 

3.66

%

Other noninterest-bearing liabilities

 

 

11,950

 

 

 

 

 

 

 

 

 

 

 

18,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities

 

 

984,852

 

 

 

 

 

 

 

 

 

 

 

873,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shareholders' equity

 

 

120,559

 

 

 

 

 

 

 

 

 

 

 

115,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders' equity

 

$

1,105,411

 

 

 

 

 

 

 

 

 

 

$

988,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and NIM (5)

 

 

 

 

 

$

8,503

 

 

 

3.29

%

 

 

 

 

 

$

8,225

 

 

 

3.60

%

 

$

278

 

 

$

(852

)

 

$

1,130

 

Total cost of funds (6)

 

 

 

 

 

 

 

 

 

 

1.58

%

 

 

 

 

 

 

 

 

 

 

1.08

%

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread (7)

 

 

 

 

 

 

 

 

 

 

2.97

%

 

 

 

 

 

 

 

 

 

 

3.38

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Income and yield on tax-exempt securities assumes a federal income tax rate of 21% and 34% for the 2018 and 2017 periods, respectively..

30


(2)

Includes loan fees and nonaccrual loans.

(3)

Includes accretion of fair value adjustments (discounts)discounts on loans acquired in the Merger of $547$197 thousand and $451$547 thousand for the three months ended June 30, 20182019 and June 30, 2017,2018, respectively.

(4)

Includes amortization of fair value adjustments on time deposits acquired in the Merger of $42$31 thousand and $117$42 thousand for the three months ended June 30, 20182019 and June 30, 2017,2018, respectively.

(5)

Net interest margin is net interest income divided by average interest-earning assets.

(6)

NetCost of funds is total interest spread is the yield on average interest-earning assets less the cost of averageexpense divided by total interest-bearing liabilities.

Interest income for the three months ended June 30, 2018, on a taxable-equivalent basis, was $10.5 million, an increase of $1.6 million from the second quarter of 2017, primarily driven by higher average interest-earning assets of $913.5 million in the 2018 period compared to $790.1 million in the 2017 period, an increase of $123.4 million. This increase in average interest-earning assets was primarily attributable to organic loan growth and higher yields on loans and securities due to the increasing interest rate environment.

Interest expense for the three months ended June 30, 2018 was $2.3 million, an increase of $866 thousand from the second quarter of 2017, primarily driven by higher average interest-bearing liabilities of $747.2 million in the 2018 period compared to $667.7 million in the 2017 period, an increase of $79.5 million. This increase in average interest-bearing liabilities was primarily attributable to organic retail deposit growth, particularly timeliabilities and noninterest-bearing deposits. Also contributing to the increase in interest expense in the second quarter of 2018 compared to the second quarter of 2017 was higher rates paid on deposits (1.08% and 0.75% for the second quarters of 2018 and 2017, respectively) and Federal Home Loan Bank of Atlanta (“FHLB”) advances (2.32% and 1.29% for the second quarter of 2018 and 2017, respectively) due to the increasing interest rate environment.

30


Due to the changes in interest income and interest expense discussed above, net interest income for the three months ended June 30, 2018, on a taxable-equivalent basis, was $8.2 million, an increase of $722 thousand from the second quarter of 2017.

Net interest margin was 3.60% and 3.80% for the three months ended June 30, 2018 and 2017, respectively. This decrease is primarily attributable to the increase in funding costs, partially offset by the effects of higher accretion of fair value adjustments (discounts) on acquired loans ($547 thousand and $451 thousand for 2018 and 2017, respectively) and the amortization of fair value adjustments (premium) on time deposits ($42 thousand and $117 thousand for 2018 and 2017, respectively). Excluding the acquisition accounting adjustments on loans and time deposits, net interest margin was 3.34% in the 2018 period compared to 3.51% in the 2017 period.

The following table presents average interest-earning assets and interest-bearing liabilities, tax-equivalent yields on such assets and rates (costs) paid on such liabilities, and net interest margin, as of and for the periods stated

 

 

Average Balances, Income and Expense, Yields and Rates

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

INTEREST-EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

62,075

 

 

$

894

 

 

 

2.88

%

 

$

36,096

 

 

$

617

 

 

 

3.42

%

Tax-exempt securities (1)

 

 

19,218

 

 

 

300

 

 

 

3.12

%

 

 

19,196

 

 

 

345

 

 

 

3.60

%

Total securities

 

 

81,293

 

 

 

1,194

 

 

 

2.94

%

 

 

55,292

 

 

 

962

 

 

 

3.48

%

Gross loans (2) (3)

 

 

786,973

 

 

 

19,729

 

 

 

5.01

%

 

 

539,156

 

 

 

12,714

 

 

 

4.72

%

Interest-bearing deposits and federal funds sold

 

 

37,528

 

 

 

304

 

 

 

1.62

%

 

 

23,294

 

 

 

94

 

 

 

0.81

%

Certificates of deposits

 

 

3,224

 

 

 

37

 

 

 

2.30

%

 

 

3,744

 

 

 

37

 

 

 

1.96

%

Total interest-earning assets

 

$

909,018

 

 

$

21,264

 

 

 

4.68

%

 

$

621,486

 

 

$

13,807

 

 

 

4.44

%

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

32,494

 

 

$

92

 

 

 

0.29

%

 

$

55,136

 

 

$

58

 

 

 

0.21

%

Demand deposits

 

 

82,598

 

 

 

83

 

 

 

0.20

%

 

 

68,343

 

 

 

63

 

 

 

0.18

%

Time deposits (4)

 

 

368,582

 

 

 

2,568

 

 

 

1.40

%

 

 

209,401

 

 

 

1,251

 

 

 

1.19

%

Money market deposits

 

 

151,239

 

 

 

657

 

 

 

0.87

%

 

 

109,098

 

 

 

335

 

 

 

0.61

%

Total deposits

 

 

634,913

 

 

 

3,400

 

 

 

1.02

%

 

 

441,978

 

 

 

1,707

 

 

 

0.77

%

Federal funds purchased

 

 

 

 

 

 

 

 

0.00

%

 

 

1,339

 

 

 

10

 

 

 

1.54

%

Securities sold under repurchase agreements

 

 

7,008

 

 

 

7

 

 

 

0.20

%

 

 

8,876

 

 

 

7

 

 

 

0.16

%

Subordinated notes and ESOP debt

 

 

7,987

 

 

 

256

 

 

 

6.41

%

 

 

6,865

 

 

 

236

 

 

 

6.86

%

FHLB advances

 

 

66,796

 

 

 

699

 

 

 

2.09

%

 

 

59,542

 

 

 

402

 

 

 

1.35

%

Total interest-bearing liabilities

 

$

716,704

 

 

$

4,362

 

 

 

1.17

%

 

$

518,600

 

 

$

2,362

 

 

 

0.91

%

Net interest income and net interest margin (5)

 

 

 

 

 

$

16,902

 

 

 

3.72

%

 

 

 

 

 

$

11,445

 

 

 

3.68

%

Noninterest-bearing deposits

 

$

103,424

 

 

 

 

 

 

 

 

 

 

$

83,510

 

 

 

 

 

 

 

 

 

Total cost of funds

 

 

 

 

 

 

 

 

 

 

1.02

%

 

 

 

 

 

 

 

 

 

 

0.78

%

Net interest spread (6)

 

 

 

 

 

 

 

 

 

 

3.51

%

 

 

 

 

 

 

 

 

 

 

3.53

%

(1)

Income and yield on tax-exempt securities assumes a federal income tax rate of 21% and 34% for the 2018 and 2017 periods, respectively.

(2)

Includes loan fees and nonaccrual loans.

(3)

Includes accretion of fair value adjustments (discounts) on loans of $1.1 million and $451 thousand for the six months ended June 30, 2018 and June 30, 2017, respectively.

(4)

Includes amortization of fair value adjustments on time deposits of $110 thousand and $117 thousand for the six months ended June 30, 2018 and June 30, 2017, respectively.

(5)

Net interest margin is net interest income divided by average interest-earning assets.

(6)(7)

Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.

(8)

Change in income/expense due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

Interest income for the sixthree months ended June 30, 2018,2019, on a taxable-equivalent basis, was $21.3$12.3 million, an increase of $7.5$1.8 million from the first six monthssecond quarter of 2017,2018, primarily driven byattributable to higher average interest-earning assets of $909.0$1.04 billion in the 2019 period compared to $913.5 million in the 2018 period, compared to $621.5 million in the 2017 period, an increase of $287.5 million. This$124.0 million, and higher yields on gross loans quarter-over-quarter. The increase in average interest-earning assets was primarily attributable to interest-earning assets acquiredhigher average gross loan balances in the Merger included from2019 period of $119.1 million. Higher loan yields in the effective date2019 period were partially offset by lower accretion of the Merger and organicacquired loan growth. Also contributing to the increase in interestdiscounts, which had a negative 11 basis point effect on quarter-over-quarter yields, as further discussed below. Interest income in the first six monthssecond quarter of 2018 compared to the first six months of 2017 were higher yields on loans due to the increasing interest rate environment and higher accretion of discounts on acquired loans of $1.1 million in the 2018 period compared to $451included negative adjustments totaling $145 thousand in the 2017 period.

31


Interest expense for the six months ended June 30, 2018 was $4.4 million, an increase of $2.0 million from the first six months of 2017, primarily driven by higher average interest-bearing liabilities of $716.7 million in the 2018 period compared to $518.6 million in the 2017 period, an increase of $198.1 million. This increase in average interest-bearing liabilities was primarily attributable to liabilities assumed in the Merger and organic deposit growth. Also contributing to the increase in interest expenseamounts incorrectly reported in the first six monthsquarter of 2018, compared to the first six months of 2017 was higher rates paid on deposits (1.02% and 0.77% for the second half of 2018 and 2017, respectively) and FHLB advances (2.09% and 1.35% for the first six months of 2018 and 2017, respectively) and due to the increasing interest rate environment.

Due to the changes in interest income and interest expense discussed above, net interest income for the six months ended June 30, 2018, on a taxable-equivalent basis, was $16.9 million, an increase of $5.5 million from the second half of 2017.

Net interest margin was 3.72% and 3.68% for the six months ended June 30, 2018 and 2017, respectively. This increase is primarily attributable to the effects of accretion of discounts on acquired loans, partially offset by increased funding costs. Excluding the acquisition accounting adjustments on loans and time deposits, net interest margin was 3.35% in the 2018 period compared to 3.50% in the 2017 period.as previously reported.

Loans acquired in the Merger were discounted to estimated fair value (for credit losses and interest rates) as of the effective date of the Merger. A portion of the acquisition accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans for those loans that were deemed to be, as of the Merger date, purchased performing and over the period of expected cash flows from the loans that were deemed to be purchased credit-impaired (or “PCI”(“PCI”). The amount of accretion income recognized within a period is based on many factors, including among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility. Accretion of discounts on acquired loans in the second quarter of 2019 was $197 thousand compared to $547 thousand in the second quarter of 2018, a $350 thousand decline.

A time deposit (certificate of deposit) fair value adjustment was also recorded asAverage interest-earning assets comprised 93.9% and 92.5% of the Merger date,Company’s average assets for the three months ended June 30, 2019 and 2018, respectively.

Interest expense for the three months ended June 30, 2019 was $3.8 million, an increase of $1.5 million from the second quarter of 2018, primarily attributable to higher costs of interest-bearing liabilities. Average interest-bearing liabilities increased by $110.1 million to $857.4 million in the 2019 period compared to $747.2 million in the 2018 period. The increase in average interest-bearing liabilities was primarily attributable to deposit growth, particularly money market deposits, which represents a premium overincreased $87.4 million. Higher cost of funds (1.58% and 1.08% for the valuesecond quarters of 2019 and 2018, respectively) was primarily due to competition for deposits in the contractual repaymentsCompany’s markets, the repricing of fixed-maturitymaturing time deposits, using prevailing marketand higher rates paid on Federal Home Loan Bank of Atlanta (“FHLB”) advances.

Net interest rates for similar term deposits. The resulting fair value adjustment is being amortized into interest expenseincome, on a level-yieldtaxable-equivalent basis, overfor the weighted average remaining lifethree months ended June 30, 2019 was $8.5 million, an increase of $680 thousand from the three months ended June 30, 2018.

Net interest margin was 3.29% and 3.60% for the three months ended June 30, 2019 and 2018, respectively. The decrease in NIM was primarily attributable to the increase in cost of funds, as noted above, and lower accretion of discounts on acquired time deposit portfolio.loans, also noted above, partially offset by higher yields on gross loans in the 2019 period and the negative effect of interest income adjustments in the 2018 period, as noted above.


31


The following table presents the effect of acquisition accounting adjustments (accretion of loan discountsaverage interest-earning assets and amortization of time deposits)interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, NIM, and net interest marginspread, as of and for the periods stated:stated. Yields and costs are annualized.

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Net interest margin

 

 

3.60

%

 

 

3.80

%

 

 

3.72

%

 

 

3.68

%

Acquisition accounting adjustments effect (1)

 

 

0.26

%

 

 

0.29

%

 

 

0.37

%

 

 

0.18

%

Net interest margin excluding the effect of acquisition accounting adjustments

 

 

3.34

%

 

 

3.51

%

 

 

3.35

%

 

 

3.50

%

 

 

Average Balances, Income and Expense, Yields and Rates

 

 

 

As of and for the For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019 Compared to 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance Attributable to (8)

 

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

 

Average

Balance

 

 

Income/

Expense

 

 

Yield/ Cost

 

 

Income/ Expense Variance

 

 

Rate

 

 

Volume

 

INTEREST-EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

69,937

 

 

$

1,172

 

 

 

3.38

%

 

$

62,075

 

 

$

894

 

 

 

2.88

%

 

$

278

 

 

$

166

 

 

$

112

 

Tax-exempt securities (1)

 

 

18,123

 

 

 

271

 

 

 

3.01

%

 

 

19,218

 

 

 

300

 

 

 

3.12

%

 

 

(29

)

 

 

(12

)

 

 

(17

)

Total securities

 

 

88,060

 

 

 

1,443

 

 

 

3.30

%

 

 

81,293

 

 

 

1,194

 

 

 

2.94

%

 

 

249

 

 

 

153

 

 

 

96

 

Gross loans (2) (3)

 

 

912,568

 

 

 

22,919

 

 

 

5.06

%

 

 

786,973

 

 

 

19,729

 

 

 

5.01

%

 

 

3,190

 

 

 

73

 

 

 

3,117

 

Interest-earning deposits and federal funds sold

 

 

26,470

 

 

 

312

 

 

 

2.38

%

 

 

37,528

 

 

 

304

 

 

 

1.62

%

 

 

8

 

 

 

97

 

 

 

(89

)

Certificates of deposits

 

 

3,731

 

 

 

39

 

 

 

2.11

%

 

 

3,224

 

 

 

37

 

 

 

2.30

%

 

 

2

 

 

 

(4

)

 

 

6

 

Total interest-earning assets

 

 

1,030,829

 

 

$

24,713

 

 

 

4.83

%

 

 

909,018

 

 

$

21,264

 

 

 

4.68

%

 

$

3,449

 

 

$

319

 

 

$

3,130

 

Noninterest-earning assets

 

 

66,079

 

 

 

 

 

 

 

 

 

 

 

64,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

 

$

1,096,908

 

 

 

 

 

 

 

 

 

 

$

973,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

57,586

 

 

$

87

 

 

 

0.30

%

 

$

63,494

 

 

$

92

 

 

 

0.29

%

 

$

(5

)

 

$

4

 

 

$

(9

)

Demand deposits

 

 

74,652

 

 

 

70

 

 

 

0.19

%

 

 

82,598

 

 

 

83

 

 

 

0.20

%

 

 

(13

)

 

 

(5

)

 

 

(8

)

Time deposits (4)

 

 

376,745

 

 

 

3,873

 

 

 

2.07

%

 

 

368,582

 

 

 

2,568

 

 

 

1.40

%

 

 

1,305

 

 

 

1,248

 

 

 

57

 

Money market deposits

 

 

238,628

 

 

 

1,866

 

 

 

1.58

%

 

 

151,239

 

 

 

657

 

 

 

0.87

%

 

 

1,209

 

 

 

834

 

 

 

375

 

Total deposits

 

 

747,611

 

 

 

5,896

 

 

 

1.59

%

 

 

665,913

 

 

 

3,400

 

 

 

1.04

%

 

 

2,496

 

 

 

2,080

 

 

 

416

 

Securities sold under repurchase agreements

 

 

6,406

 

 

 

7

 

 

 

0.22

%

 

 

7,008

 

 

 

7

 

 

 

0.20

%

 

 

 

 

 

1

 

 

 

(1

)

Subordinated notes and ESOP debt

 

 

8,592

 

 

 

275

 

 

 

6.45

%

 

 

7,987

 

 

 

256

 

 

 

6.41

%

 

 

19

 

 

 

 

 

 

19

 

FHLB advances

 

 

92,884

 

 

 

1,319

 

 

 

2.86

%

 

 

66,796

 

 

 

699

 

 

 

2.10

%

 

 

620

 

 

 

348

 

 

 

272

 

Total interest-bearing liabilities

 

 

855,493

 

 

$

7,497

 

 

 

1.77

%

 

 

747,704

 

 

$

4,362

 

 

 

1.18

%

 

$

3,135

 

 

$

2,429

 

 

$

706

 

Noninterest-bearing deposits

 

 

112,250

 

 

 

 

 

 

 

 

 

 

 

103,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

9,829

 

 

 

 

 

 

 

 

 

 

 

8,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities

 

 

977,572

 

 

 

 

 

 

 

 

 

 

 

859,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shareholders' equity

 

 

119,336

 

 

 

 

 

 

 

 

 

 

 

113,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders' equity

 

$

1,096,908

 

 

 

 

 

 

 

 

 

 

$

973,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and NIM (5)

 

 

 

 

 

$

17,216

 

 

 

3.37

%

 

 

 

 

 

$

16,902

 

 

 

3.75

%

 

$

314

 

 

$

(2,110

)

 

$

2,424

 

Total cost of funds (6)

 

 

 

 

 

 

 

 

 

 

1.56

%

 

 

 

 

 

 

 

 

 

 

0.98

%

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread (7)

 

 

 

 

 

 

 

 

 

 

3.06

%

 

 

 

 

 

 

 

 

 

 

3.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Acquisition accounting adjustmentsIncome and yield on tax-exempt securities assumes a federal income tax rate of 21%.

(2)

Includes loan fees and nonaccrual loans.

(3)

Includes accretion of fair value discounts on loans acquired in the Merger of $636 thousand and $1.1 million for the three and six months ended June 30, 2019 and 2018, include accretion of discounts on acquired loans of $547 thousand and $1.1 million, respectively, andrespectively.

(4)

Includes amortization of premiumfair value adjustments on acquired time deposits acquired in the Merger of $42$65 thousand and $110 thousand respectively. Acquisition accounting adjustments for the three and six months ended June 30, 2017 include accretion of discounts on acquired loans2019 and amortization of premium on acquired time deposits of $451 thousand and $117 thousand,2018, respectively.

(5)

Net interest margin is net interest income divided by average interest-earning assets.

(6)

Cost of funds is total interest expense divided by total interest-bearing liabilities and noninterest-bearing deposits.

(7)

Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.

(8)

Change in income/expense due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

Interest income for the six months ended June 30, 2019, on a taxable-equivalent basis, was $24.7 million, an increase of $3.4 million from the first half of 2018, primarily attributable to higher average interest-earning assets of $1.03 billion in the 2019 period compared to $909.0 million in the 2018 period, an increase of $121.8 million. The increase in average interest-earning assets was primarily attributable to higher average gross loan balances in the 2019 period of $125.6 million. Accretion of discounts on acquired loans in the

32


first half of 2019 was $636 thousand compared to $1.1 million in the first half of 2018, a decline of $414 thousand. The higher yield on average interest-earning assets in the 2019 period was primarily due to higher loan yields, partially offset by lower accretion of acquired loan discounts, which had a negative 11 basis point effect.

Average interest-earning assets comprised 94.0% and 93.4% of the Company’s average assets for the six months ended June 30, 2019 and 2018, respectively.

Interest expense for the six months ended June 30, 2019 was $7.5 million, an increase of $3.1 million from the first half of 2018, primarily attributable to higher costs of interest-bearing liabilities. Average interest-bearing liabilities increased by $107.8 million to $855.5 million in the 2019 period compared to $747.7 million in the 2018 period. The increase in average interest-bearing liabilities was primarily attributable to deposit growth, particularly money market deposits, which increased $87.4 million. Higher cost of funds (1.56% and 0.98% for the first six months of 2019 and 2018, respectively) were primarily due to competition for deposits in the Company’s markets, the repricing of maturing time deposits, and higher rates paid on FHLB.

Net interest income, on a taxable-equivalent basis, for the six months ended June 30, 2019 was $17.2 million, an increase of $314 thousand from the six months ended June 30, 2018.

Net interest margin was 3.37% and 3.75% for the six months ended June 30, 2019 and 2018, respectively. The decrease in NIM was primarily attributable to the increase in cost of funds, as noted above, and lower accretion of discounts on acquired loans ($636 thousand and $1.1 million for 2019 and 2018, respectively), partially offset by higher yields on gross loans in the 2019 period.

PROVISION FOR LOAN LOSSES

Provision for loan losses was ($348)$62 thousand for the three months ended June 30, 2018,2019, while the provision for loan losses was $568a benefit of $348 thousand in the same period of 2017.2018. Provision in the 2019 period was primarily attributable to adjustments to certain qualitative loan loss factors to adjust for the change in the composition of the Company’s loan portfolio, particularly recent growth in loan types with little or no historical losses. Reserves resulting from these factors were partially offset by lowered reserves for individually evaluated loans. Provision for loan losses in the 2018 period included a $580 thousand benefit to correct for an overstatement in the Company’s allowance for loan losses as of December 31, 2017, as previously reported. Provision for loan losses was ($28)$376 thousand for the six months ended June 30, 2018,2019, while provision for loan losses for the first half of 20172018 was $758 thousanda recovery of $28 thousand. The increase in the same period of 2017. The recovery ofprovision for loan losses in the second quarterfirst half of 2019 was primarily attributable to an increase of approximately $16.5 million of gross loans. The recovery in the 2018 isperiod was primarily dueattributable to the correction of an amount incorrectly recorded in the Company’s year-endDecember 31, 2017 allowance for loan losses for acquired loans and the decline in reserve levels for a select portfolio of consumer loans as these loan balances continue to decline. These releases were partially offset by provision recorded for organic loan growth and acquired loan charge-offs in excess of available discounts on individual loans. The Company evaluated the materiality of the error in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and Accounting Standards Codification 250, Accounting for Changes and Error Corrections, and concluded the error was immaterial to all periods impacted.overstatement.

NONINTEREST INCOME

The following tables present a summary of noninterest income and the dollar and percentage change for the periods presented. Noninterest

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

$ Change

 

 

% Change

 

Income from fiduciary activities

 

$

206

 

 

$

198

 

 

$

8

 

 

 

4.0

%

Service charges and fees on deposit accounts

 

 

246

 

 

 

152

 

 

 

94

 

 

 

61.8

%

Wealth management

 

 

262

 

 

 

282

 

 

 

(20

)

 

 

(7.1

%)

Interchange fees, net

 

 

121

 

 

 

124

 

 

 

(3

)

 

 

(2.4

%)

Other service charges and fees

 

 

27

 

 

 

30

 

 

 

(3

)

 

 

(10.0

%)

Secondary market sales and servicing

 

 

267

 

 

 

243

 

 

 

24

 

 

 

9.9

%

Increase in cash surrender value of bank owned life insurance

 

 

121

 

 

 

124

 

 

 

(3

)

 

 

(2.4

%)

Net losses on sale of available-for-sale securities

 

 

(2

)

 

 

 

 

 

(2

)

 

 

(100.0

%)

Net loss on disposition of other assets

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(100.0

%)

Gain (loss) on rabbi trust assets

 

 

40

 

 

 

(25

)

 

 

65

 

 

 

(260.0

%)

Other

 

 

8

 

 

 

35

 

 

 

(27

)

 

 

(77.1

%)

Total noninterest income

 

$

1,295

 

 

$

1,163

 

 

$

132

 

 

 

11.3

%

33


 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

$ Change

 

 

% Change

 

Income from fiduciary activities

 

$

420

 

 

$

445

 

 

$

(25

)

 

 

(5.6

%)

Service charges and fees on deposit accounts

 

 

484

 

 

 

287

 

 

 

197

 

 

 

68.6

%

Wealth management

 

 

469

 

 

 

414

 

 

 

55

 

 

 

13.3

%

Interchange fees, net

 

 

222

 

 

 

116

 

 

 

106

 

 

 

91.4

%

Other service charges and fees

 

 

56

 

 

 

61

 

 

 

(5

)

 

 

(8.2

%)

Secondary market sales and servicing

 

 

339

 

 

 

376

 

 

 

(37

)

 

 

(9.8

%)

Increase in cash surrender value of bank owned life insurance

 

 

240

 

 

 

251

 

 

 

(11

)

 

 

(4.4

%)

Net losses on sale of available-for-sale securities

 

 

(2

)

 

 

 

 

 

(2

)

 

 

(100.0

%)

Net loss on disposition of other assets

 

 

(1

)

 

 

(69

)

 

 

68

 

 

 

(98.6

%)

Gain on rabbi trust assets

 

 

130

 

 

 

27

 

 

 

103

 

 

 

381.5

%

Gain on curtailment of post-retirement benefit plan

 

 

 

 

 

352

 

 

 

(352

)

 

 

(100.0

%)

Other

 

 

28

 

 

 

74

 

 

 

(46

)

 

 

(62.2

%)

Total noninterest income

 

$

2,385

 

 

$

2,334

 

 

$

51

 

 

 

2.2

%

The increase in noninterest income forin the sixthree months ended June 30, 2017 included2019 was primarily attributable to service charges and fees on deposit accounts, as the operationsCompany implemented a consecutive days overdraft program in the second half of Virginia BanCorp since2018, and a gain on rabbi trust assets for the effective datebenefit of participants in the Merger.  Company’s deferred compensation benefit plan.

32


 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

$ Change

 

 

% Change

 

Income from fiduciary activities

 

$

198

 

 

$

229

 

 

$

(31

)

 

 

-13.5

%

Service charges and fees on deposit accounts

 

 

152

 

 

 

246

 

 

 

(94

)

 

 

-38.2

%

Non-deposit product income

 

 

282

 

 

 

115

 

 

 

167

 

 

 

145.2

%

Interchange fees, net

 

 

124

 

 

 

129

 

 

 

(5

)

 

 

-3.9

%

Other service charges and fees

 

 

30

 

 

 

45

 

 

 

(15

)

 

 

-33.3

%

Secondary market lending income

 

 

243

 

 

 

86

 

 

 

157

 

 

 

182.6

%

Increase in cash surrender value of bank owned life insurance

 

 

124

 

 

 

133

 

 

 

(9

)

 

 

-6.8

%

Net gains on sale of available-for-sale securities

 

 

 

 

 

7

 

 

 

(7

)

 

 

-100.0

%

Other income

 

 

10

 

 

 

91

 

 

 

(81

)

 

 

-89.0

%

Total non-interest income

 

$

1,163

 

 

$

1,081

 

 

$

82

 

 

 

7.6

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

$ Change

 

 

% Change

 

Income from fiduciary activities

 

$

445

 

 

$

474

 

 

$

(29

)

 

 

-6.1

%

Service charges and fees on deposit accounts

 

 

287

 

 

 

458

 

 

 

(171

)

 

 

-37.3

%

Non-deposit product income

 

 

414

 

 

 

195

 

 

 

219

 

 

 

112.3

%

Interchange fees, net

 

 

116

 

 

 

204

 

 

 

(88

)

 

 

-43.1

%

Other service charges and fees

 

 

61

 

 

 

77

 

 

 

(16

)

 

 

-20.8

%

Secondary market lending income

 

 

376

 

 

 

201

 

 

 

175

 

 

 

87.1

%

Increase in cash surrender value of bank owned life insurance

 

 

251

 

 

 

208

 

 

 

43

 

 

 

20.7

%

Net gains on sale of available-for-sale securities

 

 

 

 

 

2

 

 

 

(2

)

 

 

100.0

%

Net losses on disposition of other assets

 

 

(69

)

 

 

 

 

 

(69

)

 

 

-100.0

%

Gain on curtailment of post-retirement benefit plan

 

 

352

 

 

 

 

 

 

352

 

 

 

100.0

%

Other income

 

 

101

 

 

 

152

 

 

 

(51

)

 

 

-33.6

%

Total non-interest income

 

$

2,334

 

 

$

1,971

 

 

$

363

 

 

 

18.4

%

NoninterestHigher noninterest income in the six months ended June 30, 2019 was primarily attributable to higher service charges and fees on deposit accounts, due to lower fee income collected in the 2018 period due to the core operating system conversion initiated in the fourth quarter of 2017 as a result of the Merger, and interchange fees, net, and a larger gain on rabbi trust assets. The first half of 2018 included a gain of $352 thousand on the curtailment of the Company’s post-retirement benefit plan effectiveon March 1, 2018. The increase in non-deposit product income is due to higher commissions earned by VCBFG.


34


NONINTEREST EXPENSE

The following tables present a summary of noninterest expense and the dollar and percentage change for the periods presented.

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

3,892

 

 

$

4,273

 

 

$

(381

)

 

 

(8.9

%)

Occupancy

 

 

837

 

 

 

874

 

 

 

(37

)

 

 

(4.2

%)

Data processing

 

 

609

 

 

 

834

 

 

 

(225

)

 

 

(27.0

%)

Bank franchise tax

 

 

230

 

 

 

177

 

 

 

53

 

 

 

29.9

%

Telecommunications and other technology

 

 

262

 

 

 

166

 

 

 

96

 

 

 

57.8

%

FDIC assessments

 

 

162

 

 

 

187

 

 

 

(25

)

 

 

(13.4

%)

Foreclosed property

 

 

19

 

 

 

53

 

 

 

(34

)

 

 

(64.2

%)

Consulting

 

 

147

 

 

 

341

 

 

 

(194

)

 

 

(56.9

%)

Advertising and marketing

 

 

109

 

 

 

153

 

 

 

(44

)

 

 

(28.8

%)

Directors’ fees

 

 

213

 

 

 

68

 

 

 

145

 

 

 

213.2

%

Audit and accounting

 

 

189

 

 

 

240

 

 

 

(51

)

 

 

(21.3

%)

Legal

 

 

27

 

 

 

119

 

 

 

(92

)

 

 

(77.3

%)

Core deposit intangible amortization

 

 

173

 

 

 

203

 

 

 

(30

)

 

 

(14.8

%)

Net other real estate owned loss

 

 

72

 

 

 

84

 

 

 

(12

)

 

 

14.3

%

Other

 

 

651

 

 

 

790

 

 

 

(139

)

 

 

(17.6

%)

Total noninterest expense

 

$

7,592

 

 

$

8,562

 

 

$

(970

)

 

 

(11.3

%)

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

7,893

 

 

$

8,379

 

 

$

(486

)

 

 

(5.8

%)

Occupancy

 

 

1,705

 

 

 

1,659

 

 

 

46

 

 

 

2.8

%

Data processing

 

 

1,197

 

 

 

1,306

 

 

 

(109

)

 

 

(8.3

%)

Bank franchise tax

 

 

446

 

 

 

353

 

 

 

93

 

 

 

26.3

%

Telecommunications and other technology

 

 

469

 

 

 

362

 

 

 

107

 

 

 

29.6

%

FDIC assessments

 

 

378

 

 

 

370

 

 

 

8

 

 

 

2.2

%

Foreclosed property

 

 

62

 

 

 

65

 

 

 

(3

)

 

 

(4.6

%)

Consulting

 

 

262

 

 

 

723

 

 

 

(461

)

 

 

(63.8

%)

Advertising and marketing

 

 

176

 

 

 

221

 

 

 

(45

)

 

 

(20.4

%)

Directors’ fees

 

 

377

 

 

 

236

 

 

 

141

 

 

 

59.7

%

Audit and accounting

 

 

393

 

 

 

603

 

 

 

(210

)

 

 

(34.8

%)

Legal

 

 

110

 

 

 

249

 

 

 

(139

)

 

 

(55.8

%)

Merger-related

 

 

 

 

 

363

 

 

 

(363

)

 

 

(100.0

%)

Core deposit intangible amortization

 

 

353

 

 

 

414

 

 

 

(61

)

 

 

(14.7

%)

Net other real estate owned loss (gains)

 

 

66

 

 

 

(57

)

 

 

123

 

 

 

(215.8

%)

Other

 

 

1,335

 

 

 

1,437

 

 

 

(102

)

 

 

(7.1

%)

Total noninterest expense

 

$

15,222

 

 

$

16,683

 

 

$

(1,461

)

 

 

(8.8

%)

35


Lower noninterest expenses in the three months ended June 30, 2019 compared to the same period of 2018 were primarily due to lower salaries and benefits, data processing costs, and consulting costs in the 2019 period. Lower salaries and benefits in the 2019 period were primarily due to certain management personnel that exited the Company in the third quarter of 2018 and those retiring pursuant to the fourth 2018 quarter early retirement program. Lower data processing costs in the 2019 period were primarily due to higher expenses in the 2018 period related primarily to Merger conversion activities, while consulting expenses related to the implementation of an enterprise risk management platform and a three-year strategic plan.

Noninterest expenses forin the six months ended June 30, 20172018 included $363 thousand of merger-related expenses, while there were no merger-related expenses in the operationsfirst half of Virginia BanCorp from the effective date of the Merger.

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

4,273

 

 

$

3,321

 

 

$

952

 

 

 

28.7

%

Occupancy

 

 

882

 

 

 

693

 

 

 

189

 

 

 

27.3

%

Data processing

 

 

837

 

 

 

394

 

 

 

443

 

 

 

112.4

%

Bank franchise tax

 

 

177

 

 

 

142

 

 

 

35

 

 

 

24.6

%

Telecommunications

 

 

131

 

 

 

76

 

 

 

55

 

 

 

72.4

%

FDIC assessments

 

 

187

 

 

 

111

 

 

 

76

 

 

 

68.5

%

Foreclosed property

 

 

53

 

 

 

59

 

 

 

(6

)

 

 

-10.2

%

Consulting

 

 

346

 

 

 

97

 

 

 

249

 

 

 

256.7

%

Advertising and marketing

 

 

153

 

 

 

54

 

 

 

99

 

 

 

183.3

%

Directors’ fees

 

 

68

 

 

 

209

 

 

 

(141

)

 

 

-67.5

%

Audit and accounting fees

 

 

240

 

 

 

217

 

 

 

23

 

 

 

10.6

%

Legal

 

 

119

 

 

 

13

 

 

 

106

 

 

 

815.4

%

Merger related

 

 

 

 

 

685

 

 

 

(685

)

 

 

-100.0

%

Intangible amortization

 

 

203

 

 

 

234

 

 

 

(31

)

 

 

100.0

%

Net other real estate owned losses (gains)

 

 

84

 

 

 

(3

)

 

 

87

 

 

 

-2900.0

%

Other

 

 

809

 

 

 

844

 

 

 

(35

)

 

 

-4.1

%

Total non-interest expense

 

$

8,562

 

 

$

7,146

 

 

$

1,416

 

 

 

19.8

%

33


Noninterest expenses2019. In addition, costs associated with the succession of the Company’s CFO was approximately $200 thousand in the three months ended June 30, 2018. Higher consulting fees were primarilyChief Financial Officer and costs related to projects in process, such as enterprise risk management, and a Sarbanes-Oxley readiness assessment, and legal fees incurred in the preparation of the annual proxy.

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

8,379

 

 

$

6,145

 

 

$

2,234

 

 

 

36.4

%

Occupancy

 

 

1,677

 

 

 

1,132

 

 

 

545

 

 

 

48.1

%

Data processing

 

 

1,385

 

 

 

598

 

 

 

787

 

 

 

131.6

%

Bank franchise tax

 

 

353

 

 

 

218

 

 

 

135

 

 

 

61.9

%

Telecommunications

 

 

237

 

 

 

104

 

 

 

133

 

 

 

127.9

%

FDIC assessments

 

 

370

 

 

 

196

 

 

 

174

 

 

 

88.8

%

Foreclosed property

 

 

65

 

 

 

69

 

 

 

(4

)

 

 

-5.8

%

Consulting

 

 

729

 

 

 

151

 

 

 

578

 

 

 

382.8

%

Advertising and marketing

 

 

221

 

 

 

127

 

 

 

94

 

 

 

74.0

%

Directors’ fees

 

 

236

 

 

 

331

 

 

 

(95

)

 

 

-28.7

%

Audit and accounting fees

 

 

603

 

 

 

245

 

 

 

358

 

 

 

146.1

%

Legal

 

 

249

 

 

 

95

 

 

 

154

 

 

 

162.1

%

Merger related

 

 

363

 

 

 

985

 

 

 

(622

)

 

 

-63.1

%

Intangible amortization

 

 

414

 

 

 

234

 

 

 

180

 

 

 

100.0

%

Net other real estate owned (gains) losses

 

 

(57

)

 

 

93

 

 

 

(150

)

 

 

-161.3

%

Other

 

 

1,459

 

 

 

1,305

 

 

 

154

 

 

 

11.8

%

Total non-interest expense

 

$

16,683

 

 

$

12,028

 

 

$

4,655

 

 

 

38.7

%

There were no merger related expenses reported in the three months ended June 30, 2018. Expenses associated with the succession of the Company’s CFO and fees incurred in the first half of 2018 in the completion of the Company’s 2017 year-end financial reporting, weretotaling approximately $1.2 million. Expenses associated with these items are primarily recorded inmillion, which increased salaries and employee benefits, consulting, and audit and accounting during this period. Lower data processing and consulting costs in the 2019 period were primarily due to those items discussed above. Audit and accounting fees in the six months ended June 30, 2018 include expenses associated with a Sarbanes-Oxley readiness assessment. Additionally, the first half of 2018 included a net gain on the sale and legal.valuation of other real estate owned of $57 thousand compared to a $66 thousand net loss in the first half of 2019.

The following table below presents the income tax expense and effective income tax rate for the periods presented.

 

Three Months Ended

 

 

Six Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Income tax expense

 

$

197

 

 

$

254

 

 

$

447

 

 

$

133

 

 

$

395

 

 

$

197

 

 

$

732

 

 

$

447

 

Effective tax rate

 

 

17.2

%

 

 

31.3

%

 

 

17.8

%

 

 

25.9

%

Effective income tax rate

 

 

18.6

%

 

 

17.2

%

 

 

18.6

%

 

 

17.8

%

Lower effective tax rates in the 2018 periods reflected the Tax Cuts and Jobs Act of 2017 enacted in December 2017, which reduced the federal corporate marginal income tax rate from 34% to 21%, effective January 1, 2018.

ASSET QUALITY

Loans charged-off during the second quarter of 2018,2019, net of recoveries, totaled $462$441 thousand compared to $320$462 thousand for the second quarter 2017. This represents a slight increase in the annualized net charge-off ratio to 0.23% for the second quarter of 2018, compared to 0.20%resulting in an annualized net charge-off ratio of 0.19% and 0.23% for the second quarter of 2017.three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2018,2019, the annualized net charge off ratio was 0.16%0.18% compared to 0.14%0.16% for the six months ended June 30, 2017.2018.

The ratio of allowance for loan losses (“ALL”) to gross loans was 0.89%0.82% as of June 30, 20182019 compared to 1.01%0.88% as of December 31, 2017. Gross Loans is inclusive of loans acquired2018. The decline in the Merger, which were recorded at fair value asratio of allowance for loan losses to gross loans since December 31, 2018 was primarily attributable to the datereduction in balances (and related allowance for loan losses) attributable to a select portfolio of the Merger.purchased consumer loans.

34


The following table presents certain asset quality measures as of the dates stated.

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

Loans 90 days or more past due and still accruing (1)

 

$

 

 

$

48

 

 

$

 

 

$

 

Nonaccrual loans (1)

 

 

3,474

 

 

 

6,496

 

 

 

4,577

 

 

 

5,206

 

Total nonperforming loans

 

 

3,474

 

 

 

6,544

 

 

 

4,577

 

 

 

5,206

 

Other real estate owned, net

 

 

3,501

 

 

 

4,284

 

 

 

3,168

 

 

 

3,597

 

Total nonperforming assets

 

$

6,975

 

 

$

10,828

 

 

$

7,745

 

 

$

8,803

 

Allowance for loan losses

 

$

7,113

 

 

$

7,770

 

 

$

7,479

 

 

$

7,902

 

ALL to gross loans

 

 

0.89

%

 

 

1.01

%

 

 

0.82

%

 

 

0.88

%

Nonperforming assets to total assets

 

 

0.71

%

 

 

1.12

%

 

 

0.71

%

 

 

0.81

%

Nonperforming loans to gross loans

 

 

0.43

%

 

 

0.85

%

 

 

0.50

%

 

 

0.58

%

 

(1)

Excludes PCI loans.

FINANCIAL CONDITION

Total assets increased by $12.7$13.6 million to $983.2 million$1.09 billion as of June 30, 20182019 from $970.6 million$1.08 billion as of December 31, 2017,2018, primarily due to organicnet loan growth in the first half of 2018. Cash, including federal funds sold and interest-bearing deposits, was $38.5 million and $58.3 million as2019 of June 30, 2018 and December 31, 2017, respectively.$15.7 million.

The following tables present information about the Company’s securities portfolio on a taxable-equivalent basis as of the dates stated and year-to-date periods presented. The decline in fair value of $2.8 million since year-end 2017 was primarily attributable to amortization and to an increase in unrealized losses of $1.2 million, primarily due to an increase in interest rates.stated. As of June 30, 2019 and December 31, 2018, available-for-sale securities represented 7.4% and 7.6% of total assets, compared to 7.9% as of December 31, 2017.respectively.

 

 

 

June 30, 2018

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

U.S. Government agencies and mortgage backed securities

 

$

48,032

 

 

$

46,327

 

 

6.21

 

 

 

2.22

%

State and municipal obligations

 

 

21,281

 

 

 

20,891

 

 

 

5.17

 

 

 

3.12

%

Corporate bonds

 

 

7,096

 

 

 

7,104

 

 

 

4.95

 

 

 

5.37

%

Total available-for-sale securities

 

 

76,409

 

 

 

74,322

 

 

 

5.44

 

 

 

2.74

%

Restricted Securities

 

 

6,190

 

 

 

6,190

 

 

n/a

 

 

 

5.49

%

Total securities

 

$

82,599

 

 

$

80,512

 

 

 

 

 

 

 

2.94

%

36


 

 

June 30, 2019

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

U.S. Government agencies and mortgage backed securities

 

$

51,941

 

 

$

51,867

 

 

 

6.7

 

 

 

2.31

%

State and municipal obligations

 

 

16,810

 

 

 

17,054

 

 

 

4.6

 

 

 

3.03

%

Corporate bonds

 

 

12,180

 

 

 

12,248

 

 

 

4.0

 

 

 

5.68

%

Total available-for-sale securities

 

 

80,931

 

 

 

81,169

 

 

 

5.1

 

 

 

2.99

%

Restricted securities

 

 

6,769

 

 

 

6,769

 

 

n/a

 

 

 

6.71

%

Total securities

 

$

87,700

 

 

$

87,938

 

 

 

 

 

 

 

3.30

%

 

 

December 31, 2017

 

 

December 31, 2018

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

U.S. Government agencies and mortgage backed securities

 

$

49,964

 

 

$

49,283

 

 

5.76

 

 

 

1.76

%

 

$

51,126

 

 

$

49,882

 

 

 

6.1

 

 

 

2.28

%

State and municipal obligations

 

 

21,113

 

 

 

21,153

 

 

 

5.45

 

 

 

3.47

%

 

 

20,484

 

 

 

20,217

 

 

 

6.3

 

 

 

3.15

%

Corporate bonds

 

 

6,696

 

 

 

6,717

 

 

 

5.16

 

 

 

6.41

%

 

 

12,194

 

 

 

12,133

 

 

 

5.2

 

 

 

5.62

%

Total available-for-sale securities

 

 

77,773

 

 

 

77,153

 

 

 

5.46

 

 

 

2.79

%

 

 

83,804

 

 

 

82,232

 

 

 

5.9

 

 

 

2.87

%

Restricted Securities

 

 

5,787

 

 

 

5,787

 

 

n/a

 

 

 

6.54

%

Restricted securities

 

 

7,600

 

 

 

7,600

 

 

n/a

 

 

 

5.75

%

Total securities

 

$

83,560

 

 

$

82,940

 

 

 

 

 

 

 

3.02

%

 

$

91,404

 

 

$

89,832

 

 

 

 

 

 

 

3.08

%

During the six months ended June 30, 2018, gross loans increased by $35.1 million, or 4.6% (over 9% annualized), since December 31, 2017. Excluding the pay down of approximately $38 million in the first six months of 2018 of purchased portfolio loans, including those acquired in the Merger, gross loan growth on an annualized basis was approximately 19%. The largest components of this increase were a $16.1 million increase in residential first mortgages, $15.0 million increase in construction, land, and land development loans, a $10.5 million increase in commercial and industrial loans, and a $10.1 million increase in commercial mortgages, partially offset by a $9.8 million decline in consumer loans, primarily select pools of consumer loans acquired in the Merger.


37


The following table presents the Company’s composition of loans in dollar amounts and as a percentage of total loans as of the dates stated.

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Amount

 

 

Percent of Total

 

 

Amount

 

 

Percent of Total

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

$

110,598

 

 

 

12.2

%

 

$

109,475

 

 

 

12.2

%

Commercial mortgages (non-owner occupied)

 

 

178,532

 

 

 

19.5

%

 

 

180,074

 

 

 

20.0

%

Commercial mortgages (owner occupied)

 

 

82,990

 

 

 

9.0

%

 

 

87,241

 

 

 

9.7

%

Residential first mortgages

 

 

305,252

 

 

 

33.2

%

 

 

298,894

 

 

 

33.1

%

Residential revolving and junior mortgages

 

 

35,875

 

 

 

3.9

%

 

 

38,313

 

 

 

4.2

%

Commercial and industrial

 

 

187,531

 

 

 

20.4

%

 

 

164,608

 

 

 

18.2

%

Consumer

 

 

16,889

 

 

 

1.8

%

 

 

23,740

 

 

 

2.6

%

Total loans

 

 

917,667

 

 

 

100.0

%

 

 

902,345

 

 

 

100.0

%

Net unamortized deferred loan fees

 

 

(275

)

 

 

 

 

 

 

(252

)

 

 

 

 

Allowance for loan losses

 

 

(7,479

)

 

 

 

 

 

 

(7,902

)

 

 

 

 

Loans receivable, net

 

$

909,913

 

 

 

 

 

 

$

894,191

 

 

 

 

 

35


 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Amount

 

 

Percent of Total

 

 

Amount

 

 

Percent of Total

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land and Land Development

 

$

81,059

 

 

 

10.1

%

 

$

66,042

 

 

 

8.6

%

Farmland

 

 

770

 

 

 

0.1

%

 

 

923

 

 

 

0.1

%

Commercial Mortgages (Non-Owner Occupied)

 

 

156,891

 

 

 

19.6

%

 

 

146,757

 

 

 

19.2

%

Commercial Mortgages (Owner Occupied)

 

 

80,258

 

 

 

10.0

%

 

 

80,052

 

 

 

10.4

%

Residential First Mortgages

 

 

285,477

 

 

 

35.6

%

 

 

269,365

 

 

 

35.2

%

Residential Revolving and Junior Mortgages

 

 

39,747

 

 

 

5.0

%

 

 

46,498

 

 

 

6.1

%

Commercial and Industrial loans

 

 

124,563

 

 

 

15.5

%

 

 

114,093

 

 

 

14.9

%

Consumer loans

 

 

32,767

 

 

 

4.1

%

 

 

42,566

 

 

 

5.6

%

Total loans

 

 

801,532

 

 

 

 

 

 

 

766,296

 

 

 

 

 

Net unamortized deferred loan costs

 

 

24

 

 

 

 

 

 

 

200

 

 

 

 

 

Allowance for loan losses

 

 

(7,113

)

 

 

 

 

 

 

(7,770

)

 

 

 

 

Loans receivable, net

 

$

794,443

 

 

 

 

 

 

$

758,726

 

 

 

 

 

Allowance for loan losses decreasedDuring the six months ended June 30, 2019, gross loans increased by $657 thousand since$15.3 million, an annualized growth rate of over 3%, from December 31, 2017 to $7.12018. Excluding the payoff of approximately $19.5 million as of purchased portfolio loans in the first half of 2019, including those acquired in the Merger, gross loan growth for the six months ended June 30, 2018, primarily due to charge offs (net2019 on an annualized basis was nearly 8%. The largest components of recoveries)this increase were a $22.9 million increase in commercial and the correction of an amount recordedindustrial loans and a $3.9 million increase in the Company’s year-end 2017 allowance for loan losses.residential loans, partially offset by a $6.9 million decline in consumer loans and a $5.8 million decline in commercial mortgages.

The following table presents the Company’s allowance for loan lossesALL by loan type and the percent of loans in each category to total loans as of the dates stated.

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

 

Amount

 

 

Percent of loans in each category to total loans

 

 

Amount

 

 

Percent of loans in each category to total loans

 

 

Amount

 

 

Percent of loans in each category to total loans

 

 

Amount

 

 

Percent of loans in each category to total loans

 

Mortgage loans on real estate

 

$

4,244

 

 

 

80.4

%

 

$

3,864

 

 

 

79.6

%

 

$

5,052

 

 

 

77.8

%

 

$

4,967

 

 

 

79.2

%

Commercial and Industrial loans

 

 

944

 

 

 

15.5

%

 

 

878

 

 

 

14.9

%

Consumer loans

 

 

1,925

 

 

 

4.1

%

 

 

3,028

 

 

 

5.6

%

Commercial and industrial

 

 

1,537

 

 

 

20.4

%

 

 

1,374

 

 

 

18.2

%

Consumer

 

 

890

 

 

 

1.8

%

 

 

1,561

 

 

 

2.6

%

Total allowance for loan losses

 

$

7,113

 

 

 

 

 

 

$

7,770

 

 

 

 

 

 

$

7,479

 

 

 

100.0

%

 

$

7,902

 

 

 

100.0

%

OREO

Allowance for loan losses decreased $423 thousand from December 31, 2018 to $7.5 million as of June 30, 20182019, primarily due to net charge-offs of $799 thousand, almost exclusively for a select portfolio of purchased consumer loans, partially offset by provision for loan losses of $376 thousand recorded for the six months ended June 30, 2019.

Other real estate owned, net (“OREO”), as of June 30, 2019 was $3.5$3.2 million, consisting of 26 individual22 properties (20(16 of which were land lots), compared to $4.3$3.6 million inof OREO (29(26 properties) as of December 31, 2017,2018, or a $783$429 thousand decline.decrease. This declinedecrease was primarily attributable to the sale of twosix residential properties ($2.3 million481 thousand carrying amount) resulting in a net gainthe first half of approximately $257 thousand.2019, partially offset by the addition of two residential properties ($152 thousand carrying amount).

As of June 30, 2018,2019, total deposits were $775.1$875.6 million compared to $761.8$842.2 million at year-end 2017,December 31, 2018, a $13.2$33.4 million, (or 1.7%)or 8% annualized, increase. The increase was primarily due to an increase of $10.9$16.5 million in time deposits and an increase of $14.8 million in savings and interest-bearing demand deposits.

Maturities of large denomination time deposits (equal to or greater than $100 thousand) as of June 30, 20182019 are presented in the following table.

 

 

Within 3 Months

 

 

3-6 Months

 

 

6-12 Months

 

 

Over 12 Months

 

 

Total

 

 

Percent of Total Deposits

 

Time Deposits

 

 

-

 

 

 

120

 

 

 

62,401

 

 

 

137,119

 

 

 

199,640

 

 

 

25.8

%

 

 

Within 3 Months

 

 

3-6 Months

 

 

6-12 Months

 

 

Over 12 Months

 

 

Total

 

 

Percent of Total Deposits

 

Time deposits

 

$

25,984

 

 

$

40,701

 

 

$

51,991

 

 

$

100,765

 

 

$

219,441

 

 

 

25.1

%


38


As of June 30, 2018 and December 31, 20172019, the Company had one fixed rate FHLB advance of $60$60.0 million and one variable rate FHLB advance of $10$10.0 million outstanding. As of December 31, 2018, the Company had three fixed rate FHLB advances totaling $90.0 million and one variable rate FHLB advance of $10.0 million outstanding. The following table summarizes the period-end balance, highest month balance, average balance and weighted average rate of paidpresents various information regarding FHLB advances as of and for the periods presented.

 

 

 

Six Months Ended June 30, 2018

 

 

Twelve Months Ended December 31, 2017

 

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

FHLB Borrowings

 

$

70,000

 

 

$

70,000

 

 

$

66,796

 

 

 

2.09

%

 

$

70,000

 

 

$

75,000

 

 

$

52,500

 

 

 

1.87

%

 

 

Six Months Ended June 30, 2019

 

 

Year Ended December 31, 2018

 

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

FHLB advances

 

$

70,000

 

 

$

100,000

 

 

$

92,884

 

 

 

2.86

%

 

$

100,000

 

 

$

100,000

 

 

$

71,753

 

 

 

2.38

%

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans)loans or meet depositors’ requirements) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearinginterest-earning deposits with other banks, federal funds sold, and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

36


AtAs of June 30, 2018,2019, cash and cash equivalents totaled $8.3 million, federal funds sold totaled $1.9 million, interest-bearing deposits totaled $28.3 million,$24.6 million; investment securities maturing in one year or less totaled $2.5$4.7 million, and loans maturing in one year or less totaled $168.7$214.0 million. This resultsresulted in a liquidity ratio as of June 30, 20182019 of 21.3%22.2% compared to 14.7%21.5% as of December 31, 2017.2018. The Company determines this ratio by dividing the sum of cash and cash equivalents, and investment securities and loans maturing in one year or less, and federal funds sold, by total assets. The Bank has a formal liquidity management policy and contingency plan, which includes periodic evaluation of cash flow projections.

The Company has a secured borrowing line of credit with the FHLB of $248.2$274.7 million, with $172.2$186.7 million available as of June 30, 2019, and unsecured federal funds lines of credit with various correspondent banks totaling $24.5$41.0 million. Federal funds lines of credit are uncommitted and can be cancelled at any time by the lending bank.

As of June 30, 2018,2019, the Company was not aware of any other known trends, events, or uncertainties that have or are reasonably likely to have a material effect on liquidity.

CAPITAL RESOURCES

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allows management to effectively leverage its capital to maximize return to shareholders. The Company’s capital, also known as shareholders’ equity, is comprised mainlyprimarily of outstanding common stock, additional paid-in capital, and retained earnings. Capital can be increased with share offerings or with earnings.

The Company’s capital resources are alsoShareholders’ equity is primarily affected by net income and net unrealized gains or losses on available-for-sale securities, (netnet of tax).taxes. The available-for-sale securities portfolio is reported at fair value with unrealized gains or losses, net of taxes, recognized as accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Another factor affecting accumulated other comprehensive income (loss) is changes in the fair value of the Company’s pension and post-retirement benefit plans and changes in thesaid plan obligations. The Company’s shareholders’Shareholders’ equity before accumulated other comprehensive lossincome (loss), net of taxes, was $118.0$122.5 million as of June 30, 20182019 compared to $115.7$118.8 million as of December 31, 2017.2018. The increase of $2.3$3.7 million was primarily attributable to net income of $2.1$3.2 million for the six months ended June 30, 2018.2019. Accumulated other comprehensive loss increasedincome (loss), net of taxes, decreased by $1.2$1.4 million from December 31, 20172018 to June 30, 2018,2019, primarily due to an increase in unrealized net losses (netgains, net of tax)taxes, in the investmentCompany’s available-for-sale securities portfolio, primarily due to an increasing rate environment.

In August 2017, the Company completed a private placement of 3,783,784 shares of common stock at an offering price of $9.25 per share to certain existing shareholders, institutional investors, and other accredited investors. Proceeds from the offering, net of offering expenses, were $32.9 million.portfolio.

Book value per share of the Company’s common stock, including accumulated other comprehensive loss,income (loss), net of tax, increased to $8.75$9.20 as of June 30, 20182019 from $8.68$8.90 as of December 31, 2017.

On July 24, 2017, the Company paid $0.04 per common share dividend to shareholders of record as of July 11, 2017. On October 24, 2017, the Company paid $0.04 per common share dividend to shareholders of record as of October 11, 2017. On December 29, 2017, the Company paid $0.04 per common share dividend to shareholders of record December 22, 2017. The Company has not paid a dividend since December 2017.2018.

The Bank is subject to minimum regulatory capital ratios as defined by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).Reserve. As of June 30, 2018,2019, the Bank’s capital ratios continue to be in excess of regulatory minimums and the Bank is well-capitalizedwas well capitalized by these guidelines.

In July 2013, the Federal Reserve issued final rules that made changes to its capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Effective January 1, 2015, the final rules require theThe Bank is required to comply with the following minimum capital ratios: (i) a new Common Equity Tier 1 capitalCapital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capitalCapital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%);assets; (iii) a total capitalTotal Risked-based Capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement);assets; and (iv) a leverageLeverage ratio of 4.0% of total assets (unchanged from the prior requirement).assets. The following additional capital requirements related to the capital“capital conservation buffer are beingbuffer” have been phased in over a four-year period, which beganbeginning on January 1, 2016. WhenAs fully phased in on January 1, 2019, the rules will require the Bank to maintainmaintain: (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a

39


2.5% “capitalcapital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capitalCapital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capitalCapital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capitalTotal Risk-based Capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a

37


minimum total capitalTotal Risk-based Capital ratio of 10.5% upon full implementation), and (iv) a minimum leverageLeverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement is beingwas phased in as ofbeginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount0.625% each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The following table presentstables present capital ratios for the Bank, minimum capital ratios required, and ratios defined as “well-capitalized”“well capitalized” by the Bank’s regulators as of the dates stated.

 

As of June 30, 2018

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

 

 

Well-

Capitalized Ratio

 

As of June 30, 2019

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

 

 

Well-

Capitalized Ratio

 

Total risk-based capital

 

 

12.33

%

 

 

8.00

%

 

 

10.00

%

 

 

12.82

%

 

 

10.50

%

 

 

10.00

%

Tier 1 capital

 

 

11.43

%

 

 

6.00

%

 

 

8.00

%

 

 

12.00

%

 

 

8.50

%

 

 

8.00

%

Common equity tier 1

 

 

11.43

%

 

 

4.50

%

 

 

6.50

%

 

 

12.00

%

 

 

7.00

%

 

 

6.50

%

Tier 1 leverage ratio

 

 

9.44

%

 

 

4.00

%

 

 

5.00

%

 

 

10.14

%

 

 

4.00

%

 

 

5.00

%

 

As of December 31, 2017

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

 

 

Well-

Capitalized Ratio

 

As of December 31, 2018

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

 

 

Well-

Capitalized Ratio

 

Total risk-based capital

 

 

12.70

%

 

 

8.00

%

 

 

10.00

%

 

 

11.68

%

 

 

9.875

%

 

 

10.00

%

Tier 1 capital

 

 

11.65

%

 

 

6.00

%

 

 

8.00

%

 

 

10.80

%

 

 

7.875

%

 

 

8.00

%

Common equity tier 1

 

 

11.65

%

 

 

4.50

%

 

 

6.50

%

 

 

10.80

%

 

 

6.375

%

 

 

6.50

%

Tier 1 leverage ratio

 

 

8.97

%

 

 

4.00

%

 

 

5.00

%

 

 

9.42

%

 

 

4.000

%

 

 

5.00

%

OFF BALANCE SHEET COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments may involve elements of liquidity, credit and interest rate risk in excess of the amount recognized in the Company’s consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby-lettersstand-by letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional commitments as it does for on-balance sheet commitments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third party. The credit risk of issuingAdditionally, but to a much lesser extent, the Company issues financial stand-by letters of credit, is essentiallywhich guarantee payment to the same as that involved in extending loan facilitiesunderlying beneficiary (i.e., third party) if the customer fails to customers.meet its designated financial obligation.

The following table presents the Company’s off balance sheet commitments as of the dates stated.

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2019

 

 

December 31, 2018

 

Total loan commitments outstanding

 

$

156,039

 

 

$

144,249

 

 

$

156,786

 

 

$

160,479

 

Stand-by letters of credit

 

 

1,414

 

 

 

447

 

 

 

3,683

 

 

 

2,848

 

CONTRACTUAL OBLIGATIONS

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s 20172018 Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, for information related to the adoption of new amendments to the Accounting Standards Codification.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

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ITEM 4.CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controlscontrol and proceduresprocedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions.

Based upon thisthe evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective in ensuring that information required to ensurebe disclosed by the Company in the reports that material informationit files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company on aSecurities and Exchange Commission’s reports and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely basis in order to comply with the Company’sdecisions regarding disclosure, obligations under the Exchange Act and the rules and regulations promulgated under it. The aforementioned officers based this conclusion on the fact that the Company had material weaknesses as described in its 2017 Form 10-K, which were not fully remediated and tested as of June 30, 2018.

Remediation Status

Management, with oversight from the Audit Committee, is committed to remediating the material weaknesses which existed as of December 31, 2017 and is actively engaged in the implementation of a remediation plan, including the actions detailed in the 2017 Form 10-K, to ensure that controls contributing to these material weaknesses are designed appropriately and will operate effectively. In the first quarter of 2018, the Company hired a new Chief Financial Officer and Controller with substantial experience in financial reporting under the Exchange Act and in the requirements to implement appropriate changes in internal controls in areas of the findings of control deficiencies.

In the second quarter of 2018, Management designed and implemented internal controls that address and remediate a substantial number of the control deficiencies that culminated in material weaknesses as of December 31, 2017. As of the end of the quarterly period ended June 30, 2018, Management has not fully tested the operating effectiveness of these controls.2019.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

Except as noted in the preceding section, thereThere was no change to the Company’s internal control over financial reporting during the three months ended June 30, 20182019 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 1A.RISK FACTORS

There have been no material changes to the risk factors disclosed in the 20172018 Form 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None to report.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None to report.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

39


ITEM 5.OTHER5.OTHER INFORMATION

None to report.

 

4041


ITEM 6.EXHIBITS

 

 

 

 

31.1

  

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

  

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018,2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of June 30, 20182019 and December 31, 2017,2018, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 20182019 and 2017,2018, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 20182019 and 2017,2018, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 20182019 and 2017,2018, and (vi) Notes to Consolidated Financial Statements.

 


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.

 

 

 

Bay Banks of Virginia, Inc.

 

 

(Registrant)

 

 

 

 

 

August 14, 20188, 2019

 

By:

 

/s/ Randal R. Greene

 

 

 

 

Randal R. Greene

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By:

 

/s/ Judy C. Gavant

 

 

 

 

Judy C. Gavant

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

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