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EX-32.1 - EXHIBIT 32.1 - Community Bankers Trust Corptv498651_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Community Bankers Trust Corptv498651_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Community Bankers Trust Corptv498651_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2018
   
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from           to

 

Commission File Number: 001-32590

 

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia 20-2652949

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

   
9954 Mayland Drive, Suite 2100  
Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)

(804) 934-9999

(Registrant’s telephone number, including area code)

 

n/a

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

 

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

 

Large accelerated filer             o     Accelerated filer                      þ
       
Non-accelerated filer               o (Do not check if a smaller reporting company) Smaller reporting company     o
       
      Emerging growth company     o

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ

 

At June 30, 2018, there were 22,111,495 shares of the Company’s common stock outstanding.

 

 

 

 

 

COMMUNITY BANKERS TRUST CORPORATION

 

TABLE OF CONTENTS

FORM 10-Q

June 30, 2018

 

PART I — FINANCIAL INFORMATION  
Item 1. Financial Statements  
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Income 4
Unaudited Consolidated Statements of Comprehensive Income 5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity 6
Unaudited Consolidated Statements of Cash Flows 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Item 4. Controls and Procedures 42
PART II — OTHER INFORMATION  
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3. Defaults upon Senior Securities 43
Item 4. Mine Safety Disclosures 43
Item 5. Other Information 43
Item 6. Exhibits 44
SIGNATURES 44

 

 2 

 

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017

(dollars in thousands, except per share data)

 

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

 

* Derived from audited consolidated financial statements

 

See accompanying notes to unaudited consolidated financial statements

 

 3 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

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

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

 

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

 

See accompanying notes to unaudited consolidated financial statements

 

 4 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(dollars in thousands)

 

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

  

See accompanying notes to unaudited consolidated financial statements

 

 5 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(dollars and shares in thousands)

 

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

  

See accompanying notes to unaudited consolidated financial statements

 

 6 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(dollars in thousands)

 

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

  

See accompanying notes to unaudited consolidated financial statements

 

 7 

 

 

COMMUNITY BANKERS TRUST CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Nature of Banking Activities and Significant Accounting Policies

 

Organization

 

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 26 full-service offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

 

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and cash management services.

 

Financial Statements

 

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of June 30, 2018, the statements of income and comprehensive income for the three and six months ended June 30, 2018, and the statements of changes in shareholders’ equity and cash flows for the six months ended June 30, 2018. Results for the six month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

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

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

 8 

 

 

Note 2. Securities

 

Amortized costs and fair values of securities available for sale and held to maturity at June 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

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

 

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

 

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

 

   Held to Maturity   Available for Sale 
(dollars in thousands)  Amortized Cost   Fair Value   Amortized Cost   Fair Value 
   Due in one year or less  $2,661   $2,681   $9,183   $9,199 
   Due after one year through five years   23,700    23,454    89,195    88,914 
   Due after five years through ten years   13,399    13,545    96,976    95,387 
   Due after ten years   4,229    4,234    5,754    5,663 
        Total securities  $43,989   $43,914   $201,108   $199,163 

 

 9 

 

 

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

 

   Three months ended   Six months ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Gross realized gains  $26   $134   $68   $264 
Gross realized losses   (42)   (97)   (54)   (132)
Net securities gains (losses)  $(16)  $37   $14   $132 

 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three and six months ended June 30, 2018 and 2017.

 

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at June 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

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

 

   Less than 12 Months   12 Months or More   Total 
Securities Available for Sale  Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss 
U.S. Treasury issue and other U.S. Gov’t agencies  $5,097   $(36)  $19,443   $(346)  $24,540   $(382)
U.S. Gov’t  sponsored agencies   497    (3)   5,040    (21)   5,537    (24)
State, county and municipal   20,740    (188)   9,569    (408)   30,309    (596)
Corporate and other bonds   -    -    2,772    (36)   2,772    (36)
Mortgage backed – U.S. Gov’t agencies   1,722    (25)   1,876    (121)   3,598    (146)
Mortgage backed – U.S. Gov’t sponsored agencies   6,525    (111)   7,985    (262)   14,510    (373)
Total  $34,581   $(363)  $46,685   $(1,194)  $81,266   $(1,557)
                               
Securities Held to Maturity                              
U.S. Treasury issue and other U.S. Gov’t agencies  $-   $-   $9,845   $(155)  $9,845   $(155)
State, county and municipal   1,485    (14)   1,262    (19)   2,747    (33)
Total  $1,485   $(14)  $11,107   $(174)  $12,592   $(188)

 

 10 

 

 

The unrealized losses (impairments) in the investment portfolio at June 30, 2018 and December 31, 2017 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 192 securities at June 30, 2018. Of those, 185 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. Four investment grade asset-backed securities comprised of student loan pools included in corporate obligations and three corporate bonds make up the remaining securities with unrealized losses at June 30, 2018. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

 

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

 

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

 

Note 3. Loans and Related Allowance for Loan Losses

 

The Company’s loans, net of deferred fees and costs, at June 30, 2018 and December 31, 2017 were comprised of the following (dollars in thousands):

 

   June 30, 2018   December 31, 2017 
   Amount   % of Loans   Amount   % of Loans 
Mortgage loans on real estate:                    
Residential 1-4 family  $217,610    22.50%  $227,542    24.16%
Commercial   376,134    38.88    366,331    38.89 
Construction and land development   119,110    12.31    107,814    11.44 
Second mortgages   7,387    0.76    8,410    0.89 
Multifamily   54,329    5.62    59,024    6.27 
Agriculture   7,467    0.77    7,483    0.79 
  Total real estate loans   782,037    80.84    776,604    82.44 
Commercial loans   170,065    17.58    159,024    16.88 
Consumer installment loans   13,717    1.42    5,169    0.55 
All other loans   1,542    0.16    1,221    0.13 
Total loans  $967,361    100.00%  $942,018    100.00%

 

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

 

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

 

 11 

 

 

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

 

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

 

(1)The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.
(2)The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances.

 

 12 

 

 

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

 

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

 

(1)The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.
(2)The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances.

 

Troubled debt restructures still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at June 30, 2018 and December 31, 2017, is set forth in the table below (dollars in thousands):

 

   June 30, 2018   December 31, 2017 
Nonaccruals  $9,343   $9,026 
Trouble debt restructure and still accruing   8,087    5,271 
Total impaired  $17,430   $14,297 

 

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and six months ended June 30, 2018 and 2017. For the three months ended June 30, 2018 and 2017, estimated interest income of $183,000 and $201,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 30, 2018 and 2017, estimated interest income of $322,000 and $345,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

 

 13 

 

 

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

 

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

 

   December 31, 2017 
   30-89 Days Past Due   Nonaccrual   Total Past Due   Current   Total Loans Receivable 
Mortgage loans on real estate:                         
Residential 1-4 family  $1,056   $1,962   $3,018   $224,524   $227,542 
Commercial   104    1,498    1,602    364,729    366,331 
Construction and land  development       4,277    4,277    103,537    107,814 
Second mortgages               8,410    8,410 
Multifamily               59,024    59,024 
Agriculture   19    68    87    7,396    7,483 
  Total real estate loans   1,179    7,805    8,984    767,620    776,604 
Commercial loans   48    1,214    1,262    157,762    159,024 
Consumer installment loans   12    7    19    5,150    5,169 
All other loans               1,221    1,221 
Total  loans  $1,239   $9,026   $10,265   $931,753   $942,018 

 

 14 

 

 

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

 

   Three Months Ended June 30, 2018 
   March 31, 2018  

Provision

Allocation

   Charge-offs   Recoveries   June 30, 2018 
Mortgage loans on real estate:                         
Residential 1-4 family  $3,115   $431   $(53)  $58   $3,551 
Commercial   2,620    (438)       7    2,189 
Construction and land development   1,612    (218)       35    1,429 
Second mortgages   34    (3)       1    32 
Multifamily   198    128            326 
Agriculture   33    (27)           6 
Total real estate loans   7,612    (127)   (53)   101    7,533 
Commercial loans   962    199        1    1,162 
Consumer installment loans   112    (12)   (67)   136    169 
All other loans   10    (10)       3    3 
Unallocated   272    (50)           222 
Total loans  $8,968   $   $(120)  $241   $9,089 

 

   Three Months Ended June 30, 2017 
   March 31, 2017  

Provision

Allocation

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

 

   Six Months Ended June 30, 2018 
   December 31, 2017  

Provision

Allocation

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

 

 15 

 

 

   Six Months Ended June 30, 2017 
   December 31, 2016  

Provision

Allocation

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

 

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

  

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

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

   Total  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

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

 

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

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

   Total  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

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

 

 16 

 

 

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

 

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

 

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

 

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

 

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

 

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

 

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

 

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

 

 17 

 

 

In accordance with FASB Accounting Standards Update (ASU) 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 23 and 21 loans that met the definition of a TDR at June 30, 2018 and 2017, respectively.

 

During the three and six months ended June 30, 2018, the Company modified one multifamily loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $2.6 million.

 

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

 

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three and six months ended June 30, 2018 and 2017.

 

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

 

At June 30, 2018, the Company had 1-4 family mortgages in the amount of $129.7 million pledged to the Federal Home Loan Bank with a lendable collateral value of $103.6 million.

 

Note 4.  PCI Loans and Related Allowance for Loan Losses

 

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

 

As of June 30, 2018 and December 31, 2017, the outstanding contractual balance of the PCI loans was $65.2 million and $71.0 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

   June 30, 2018   December 31, 2017 
   Amount   % of PCI Loans   Amount   % of PCI Loans 
Mortgage loans on real estate:                    
Residential 1-4 family  $35,900    89.95%  $39,805    89.79%
Commercial   490    1.23    547    1.23 
Construction and land development   1,499    3.76    1,588    3.58 
Second mortgages   1,774    4.44    2,136    4.82 
Multifamily   248    0.62    257    0.58 
  Total real estate loans   39,911    100.00    44,333    100.00 
     Total PCI loans  $39,911    100.00%  $44,333    100.00%

 

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

  

 18 

 

 

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

 

   June 30, 2018   December 31, 2017 
   Allowance for loan losses   Recorded investment in loans   Allowance for loan losses   Recorded investment in loans 
Mortgage loans on real estate:                    
Residential 1-4 family  $200   $35,900   $200   $39,805 
Commercial       490        547 
Construction and land development       1,499        1,588 
Second mortgages       1,774        2,136 
Multifamily       248        257 
  Total real estate loans   200    39,911    200    44,333 
           Total PCI loans  $200   $39,911   $200   $44,333 

 

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

  

Balance, January 1, 2017  $48,355 
Accretion   (5,729)
Reclassification from nonaccretable difference   1,500 
Balance, December 31, 2017  $44,126 
Accretion   (2,670)
Reclassification to nonaccretable difference   (310)
Balance, June 30, 2018  $41,146 

 

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

 

Note 5.  Other Real Estate Owned

 

The following table presents the balances of other real estate owned at June 30, 2018 and December 31, 2017 (dollars in thousands):

 

   June 30, 2018   December 31, 2017 
Residential 1-4 family  $882   $486 
Commercial   15    15 
Construction and land development   2,250    2,290 
Total other real estate owned  $3,147   $2,791 

 

At June 30, 2018, the Company had $408,000 in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

 

Note 6.  Deposits

 

The following table provides interest bearing deposit information, by type, at June 30, 2018 and December 31, 2017 (dollars in thousands):

 

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

 

 19 

 

 

Note 7. Accumulated Other Comprehensive (Loss) Income

 

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

 

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

 

 

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

  

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

 

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

 

 20 

 

 

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

 

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

 

Details about AOCI Components  Amount Reclassified from AOCI   Affected Line Item in the Unaudited Consolidated Statement of Income
   Six months ended    
   June 30, 2018   June 30, 2017    
Securities available for sale:             
Unrealized gain (loss) on securities available for sale  $(14)  $(132)  Gain (loss) on securities transactions, net
Related tax expense   3    45   Income tax expense
   $(11)  $(87)  Net of tax

 

Note 8. Fair Values of Assets and Liabilities

 

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

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

 

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

 

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

 

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

 

 21 

 

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and the cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

 

   June 30, 2018 
   Total   Level 1   Level 2   Level 3 
Investment securities available for sale                    
    U.S. Treasury issue and other U.S. Gov’t agencies  $34,339   $-   $34,339   $- 
    U.S. Gov’t sponsored agencies   9,124    -    9,124    - 
    State, county and municipal   120,079    2,175    117,904    - 
    Corporate and other bonds   8,658    960    7,698    - 
    Mortgage backed – U.S. Gov’t agencies   5,135    -    5,135    - 
    Mortgage backed – U.S. Gov’t sponsored agencies   21,828    5,267    16,561    - 
Total investment securities available for sale   199,163    8,402    190,761    - 
Cash flow hedge   387    -    387    - 
Total assets at fair value  $199,550   $8,402   $191,148   $- 
Total liabilities at fair value  $-   $-   $-   $- 

 

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

 

Investment securities available for sale

 

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

 

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing company for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 16 report is obtained from the third party vendor on an annual basis. The Company typically makes no adjustments to the pricing service data received for its securities available for sale.

 

Cash flow hedge

 

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

 

 22 

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

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

 

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

 

Impaired loans

 

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At June 30, 2018 and December 31, 2017, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and/or deemed to be invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan within Level 2.

 

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

 

Bank premises and equipment held for sale

 

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

 

Other real estate owned

 

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

 

 23 

 

 

Fair Value of Financial Instruments

 

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

 

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

 

   June 30, 2018 
   Carrying Value  

Estimated Fair

Value

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

 

   December 31, 2017 
   Carrying Value  

Estimated Fair

Value

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

 

 24 

 

 

Note 9. Earnings Per Common Share

 

Basic earnings per common share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive common shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three and six months ended June 30, 2018 and 2017 (dollars and shares in thousands, except per share data):

 

   Net Income (Numerator)   Weighted Average Common Shares (Denominator)   Per Common Share Amount 
For the three months ended June 30, 2018               
Basic EPS  $3,782    22,096   $0.17 
Effect of dilutive stock awards       484     
Diluted EPS  $3,782    22,580   $0.17 
                
For the three months ended June 30, 2017               
Basic EPS  $2,934    21,997   $0.13 
Effect of dilutive stock awards       427     
Diluted EPS  $2,934    22,424   $0.13 
                
For the six months ended June 30, 2018               
Basic EPS  $6,376    22,086   $0.29 
Effect of dilutive stock awards       465    (0.01)
Diluted EPS  $6,376    22,551   $0.28 
                
For the six months ended June 30, 2017               
Basic EPS  $5,427    21,979   $0.25 
Effect of dilutive stock awards       461    (0.01)
Diluted EPS  $5,427    22,440   $0.24 

 

There were no antidilutive exclusions from the computation of diluted earnings per common share for the three and six months ended June 30, 2018 and 2017, respectively.

 

Note 10. Employee Benefit Plan

 

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

 

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

 

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

 

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

 

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Note 11. Cash Flow Hedge

 

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

 

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

 

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

  

Note 12. Revenue Recognition

 

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

 

Service charges on deposit accounts

 

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

 

Interchange and ATM fees

 

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

 

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Brokerage fees and commissions

 

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

 

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

 

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