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EX-32.1 - EXHIBIT 32.1 - Community Bankers Trust Corptv505032_ex32-1.htm
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EX-31.1 - EXHIBIT 31.1 - Community Bankers Trust Corptv505032_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 September 30, 2018

 

or

 

¨ 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 ¨

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ No ¨

 

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

 

Large accelerated filer        ¨   Accelerated filer                      þ
     
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 o  No þ

 

At September 30, 2018, there were 22,120,862 shares of the Company’s common stock outstanding.

 

 

  

 1 

 

 

COMMUNITY BANKERS TRUST CORPORATION

 

TABLE OF CONTENTS

FORM 10-Q

September 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 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 45
PART II — OTHER INFORMATION  
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3. Defaults upon Senior Securities 46
Item 4. Mine Safety Disclosures 46
Item 5. Other Information 46
Item 6. Exhibits 46
SIGNATURES 47

 

 2 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

(dollars in thousands, except per share data)

 

   September 30, 2018   December 31, 2017* 
ASSETS          
Cash and due from banks  $12,918   $14,642 
Interest bearing bank deposits   11,177    7,316 
Federal funds sold   240     
Total cash and cash equivalents   24,335    21,958 
           
Securities available for sale, at fair value   200,603    204,834 
Securities held to maturity, at cost (fair value of $43,195 and $46,888, respectively)   43,559    46,146 
Equity securities, restricted, at cost   7,886    9,295 
Total securities   252,048    260,275 
           
Loans   962,425    942,018 
Purchased credit impaired (PCI) loans   39,144    44,333 
Total loans   1,001,569    986,351 
Allowance for loan losses (loans of $8,993 and $8,969, respectively; PCI loans of $137 and $200, respectively)   (9,130)   (9,169)
Net loans   992,439    977,182 
           
Bank premises and equipment, net   31,782    30,198 
Bank premises and equipment held for sale   1,252     
Other real estate owned   1,732    2,791 
Bank owned life insurance   28,649    28,099 
Other assets   18,183    15,687 
Total assets  $1,350,420   $1,336,190 
           
LIABILITIES          
Deposits:          
Noninterest bearing  $158,854   $153,028 
Interest bearing   975,034    942,736 
Total deposits   1,133,888    1,095,764 
           
Federal funds purchased   10,000    4,849 
Federal Home Loan Bank advances   63,820    101,429 
Trust preferred capital notes   4,124    4,124 
Other liabilities   6,785    6,021 
Total liabilities   1,218,617    1,212,187 
           
SHAREHOLDERS’ EQUITY          
Common stock (200,000,000 shares authorized, $0.01 par value; 22,120,862 and 22,072,523 shares issued and outstanding, respectively)   221    221 
Additional paid in capital   148,494    147,671 
Retained deficit   (13,601)   (23,932)
Accumulated other comprehensive (loss) income   (3,311)   43 
Total shareholders’ equity   131,803    124,003 
Total liabilities and shareholders’ equity  $1,350,420   $1,336,190 

 

* Derived from audited consolidated financial statements

 

See accompanying notes to unaudited consolidated financial statements

 

 3 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

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

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

 

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

 

See accompanying notes to unaudited consolidated financial statements

 

 4 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(dollars in thousands)

 

   Three months ended   Nine months ended 
   September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017 
Net income  $3,955   $2,416   $10,331   $7,843 
                     
Other comprehensive (loss) income:                    
Unrealized gain (loss) on investment securities:                    
Change in unrealized (loss) gain in investment securities   (1,240)   66    (4,393)   2,001 
Tax related to unrealized loss (gain) in investment securities   272    (23)   965    (692)
Reclassification adjustment for gain in securities sold   (68)   (48)   (82)   (180)
Tax related to realized gain in securities sold   15    17    18    62 
Defined benefit pension plan:                    
Tax related to defined benefit pension plan               11 
Cash flow hedge:                    
Change in unrealized (loss) gain in cash flow hedge   (35)   55    177    86 
Tax related to cash flow hedge   8    (20)   (39)   (30)
Total other comprehensive (loss) income   (1,048)   47    (3,354)   1,258 
Total comprehensive income  $2,907   $2,463   $6,977   $9,101 

 

See accompanying notes to unaudited consolidated financial statements

 

 5 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(dollars and shares in thousands)

 

                   Accumulated     
           Additional       Other     
   Common Stock   Paid in   Retained   Comprehensive     
   Shares   Amount   Capital   Deficit   (Loss) Income   Total 
Balance January 1, 2017   21,960   $220   $146,667   $(31,128)  $(1,223)  $114,536 
Issuance of common stock   21        120            120 
Exercise and issuance of employee stock options   67        666            666 
Net income               7,843        7,843 
Other comprehensive income                   1,258    1,258 
Balance September 30, 2017   22,048   $220   $147,453   $(23,285)  $35   $124,423 
Balance January 1, 2018   22,073   $221   $147,671   $(23,932)  $43   $124,003 
Issuance of common stock   13        122            122 
Exercise and issuance of employee stock options   35        701            701 
Net income               10,331        10,331 
Other comprehensive loss                   (3,354)   (3,354)
Balance September 30, 2018   22,121   $221   $148,494   $(13,601)  $(3,311)  $131,803 

 

See accompanying notes to unaudited consolidated financial statements

 

 6 

 

 

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(dollars in thousands)

 

   September 30, 2018   September 30, 2017 
Operating activities:          
Net income  $10,331   $7,843 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and intangibles amortization   1,461    2,136 
Stock-based compensation expense   709    559 
Tax benefit of exercised stock options   (43)   (105)
Amortization of purchased loan premium   195    141 
Provision for loan losses       150 
Amortization of security premiums and accretion of discounts, net   1,215    1,331 
Net gain on sale of securities   (82)   (180)
Net gain on sale of loans   (118)    
Net loss (gain) on sale and valuation of other real estate owned   21    (4)
Originations of mortgages held for sale   (872)    
Proceeds from sales of mortgages held for sale   872     
Increase in bank owned life insurance investment   (551)   (572)
Changes in assets and liabilities:          
Increase in other assets   (912)   (1,526)
Increase in accrued expenses and other liabilities   763    400 
Net cash provided by operating activities   12,989    10,173 
           
Investing activities:          
Proceeds from sales/calls/maturities/paydowns of available for sale securities   31,397    47,313 
Proceeds from calls/maturities/paydowns of held to maturity securities   2,504    660 
Proceeds from sales/calls/maturities/paydowns of restricted equity securities   1,828    1,255 
Purchase of available for sale securities   (32,691)   (40,839)
Purchase of held to maturity securities       (643)
Purchase of restricted equity securities   (419)   (1,321)
Proceeds from sale of other real estate owned   1,434    2,118 
Net increase in loans   (21,782)   (49,063)
Principal recoveries of loans previously charged off   418    380 
Purchase of premises and equipment, net   (4,297)   (2,370)
Purchase small business investment company fund investment   (420)   (525)
Proceeds from sale of loans   5,635     
Net cash used in investing activities   (16,393)   (43,035)
           
Financing activities:          
Net increase in deposits   38,124    41,088 
Net increase (decrease) in federal funds purchased   5,151    (4,714)
Net decrease in short-term Federal Home Loan Bank borrowings   (26,500)    
Payments on long-term Federal Home Loan Bank borrowings   (11,109)   (591)
Proceeds from issuance of common stock   115    227 
Payments on long-term debt       (1,670)
Net cash provided by financing activities   5,781    34,340 
           
Net increase in cash and cash equivalents   2,377    1,478 
           
Cash and cash equivalents:          
Beginning of the period   21,958    21,072 
End of the period  $24,335   $22,550 
           
Supplemental disclosures of cash flow information:          
Interest paid  $8,193   $6,638 
Income taxes paid   2,234    3,320 
Transfers of loans to other real estate owned   396    397 
Transfers of building premises and equipment to held for sale   1,252     

 

See accompanying notes to unaudited consolidated financial statements

 

 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 25 full-service offices in Virginia and Maryland.

 

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

 

Financial Statements

 

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K 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 September 30, 2018, the statements of income and comprehensive income for the three and nine months ended September 30, 2018, and the statements of changes in shareholders’ equity and cash flows for the nine months ended September 30, 2018. Results for the nine month period ended September 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 shareholders’ equity.

 

Recent Accounting Pronouncements

 

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

 

The following public company disclosure requirements are removed:

·Transfers between Level 1 and Level 2 of the fair value hierarchy
·The policy for determining when transfers between any of the three levels have occurred
·The valuation processes used for Level 3 measurements

 

 8 

 

 

The following public company disclosure requirements are modified:

·For certain investments that calculate the net asset value, timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity
·A clarification that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date

 

The following public company disclosure requirements are new:

·The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date
·The range and weighted average of significant unobservable inputs used for Level 3 measurements. For certain unobservable inputs, an option to disclose other quantitative information in place of the weighted average is available to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs.

 

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

 

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

  

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

 

 9 

 

 

Note 2. Securities

 

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

 

   September 30, 2018 
       Gross Unrealized     
   Amortized Cost   Gains   Losses   Fair Value 
Securities Available for Sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $26,600   $30   $(593)  $26,037 
U.S. Gov’t sponsored agencies   8,378    82    (36)   8,424 
State, county and municipal   117,557    456    (2,269)   115,744 
Corporate and other bonds   9,647    73    (69)   9,651 
Mortgage backed – U.S. Gov’t agencies   14,420    114    (280)   14,254 
Mortgage backed – U.S. Gov’t sponsored agencies   27,255    5    (767)   26,493 
Total Securities Available for Sale  $203,857   $760   $(4,014)  $200,603 
                     
Securities Held to Maturity                    
U.S. Treasury issue and other U.S. Gov’t agencies  $10,000   $   $(320)  $9,680 
State, county and municipal   33,559    202    (246)   33,515 
Total Securities Held to Maturity  $43,559   $202   $(566)  $43,195 

 

   December 31, 2017 
       Gross Unrealized     
   Amortized Cost   Gains   Losses   Fair Value 
Securities Available for Sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $27,478   $64   $(359)  $27,183 
U.S. Gov’t sponsored agencies   9,247    55    (24)   9,278 
State, county and municipal   124,032    2,324    (596)   125,760 
Corporate and other bonds   7,323    173    (36)   7,460 
Mortgage backed – U.S. Gov’t agencies   18,546    138    (169)   18,515 
Mortgage backed – U.S. Gov’t sponsored agencies   16,985    26    (373)   16,638 
Total Securities Available for Sale  $203,611   $2,780   $(1,557)  $204,834 
                     
Securities Held to Maturity                    
U.S. Treasury issue and other U.S. Gov’t agencies  $10,000   $   $(155)  $9,845 
State, county and municipal   35,678    922    (33)   36,567 
Mortgage backed – U.S. Gov’t agencies   468    8        476 
Total Securities Held to Maturity  $46,146   $930   $(188)  $46,888 

 

The amortized cost and fair value of securities at September 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  $14,384   $14,047   $9,568   $9,556 
Due after one year through five years   12,986    12,908    87,659    86,959 
Due after five years through ten years   12,772    12,840    92,284    89,858 
Due after ten years   3,417    3,400    14,346    14,230 
Total securities  $43,559   $43,195   $203,857   $200,603 

 

 10 

 

 

Proceeds from sales of securities available for sale were $8.4 million and $9.1 million during the three months ended
September 30, 2018 and 2017, respectively, and $24.2 million and $30.1 million for the nine months ended September 30, 2018 and 2017, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the three and nine months ended September 30, 2018 and 2017 were as follows (dollars in thousands):

 

   Three months ended   Nine months ended 
   September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017 
Gross realized gains  $93   $114   $161   $378 
Gross realized losses   (25)   (66)   (79)   (198)
Net securities gains  $68   $48   $82   $180 

 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three and nine months ended September 30, 2018 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 September 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

   September 30, 2018 
   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss 
Securities Available for Sale                              
U.S. Treasury issue and other U.S. Gov’t agencies  $1,554   $(29)  $17,075   $(564)  $18,629   $(593)
U.S. Gov’t sponsored agencies   -    -    2,781    (36)   2,781    (36)
State, county and municipal   57,016    (1,105)   19,410    (1,164)   76,426    (2,269)
Corporate and other bonds   2,987    (34)   2,038    (35)   5,025    (69)
Mortgage backed – U.S. Gov’t agencies   4,484    (46)   3,525    (234)   8,009    (280)
Mortgage backed – U.S. Gov’t sponsored agencies   10,851    (230)   11,312    (537)   22,163    (767)
Total  $76,892   $(1,444)  $56,141   $(2,570)  $133,033   $(4,014)
                               
Securities Held to Maturity                              
U.S. Treasury issue and other U.S. Gov’t agencies  $-   $-   $9,680   $(320)  $9,680   $(320)
State, county and municipal   11,486    (208)   1,230    (38)   12,716    (246)
Total  $11,486   $(208)  $10,910   $(358)  $22,396   $(566)

 

   December 31, 2017 
   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss 
Securities Available for Sale                              
U.S. Treasury issue and other U.S. Gov’t agencies  $5,097   $(36)  $14,795   $(323)  $19,892   $(359)
U.S. Gov’t sponsored agencies   497    (3)   5,040    (21)   5,537    (24)
State, county and municipal   20,740    (188)   9,569    (408)   30,309    (596)
Corporate and other bonds   -    -    2,772    (36)   2,772    (36)
Mortgage backed – U.S. Gov’t agencies   1,722    (25)   6,524    (144)   8,246    (169)
Mortgage backed – U.S. Gov’t sponsored agencies   6,525    (111)   7,985    (262)   14,510    (373)
Total  $34,581   $(363)  $46,685   $(1,194)  $81,266   $(1,557)
                               
Securities Held to Maturity                              
U.S. Treasury issue and other U.S. Gov’t agencies  $-   $-   $9,845   $(155)  $9,845   $(155)
State, county and municipal   1,485    (14)   1,262    (19)   2,747    (33)
Total  $1,485   $(14)  $11,107   $(174)  $12,592   $(188)

 

 11 

 

 

The unrealized losses (impairments) in the investment portfolio at September 30, 2018 and December 31, 2017 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 243 securities at September 30, 2018. Of those, 234 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. Five investment grade asset-backed securities comprised of student loan pools included in corporate obligations and four corporate bonds make up the remaining securities with unrealized losses at September 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 $59.4 million and $71.7 million at September 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 each of September 30, 2018 and December 31, 2017 were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 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 September 30, 2018 and December 31, 2017 were comprised of the following (dollars in thousands):

 

   September 30, 2018   December 31, 2017 
   Amount   % of Loans   Amount   % of Loans 
Mortgage loans on real estate:                    
Residential 1-4 family  $216,203    22.46%  $227,542    24.16%
Commercial   358,490    37.25    366,331    38.89 
Construction and land development   135,021    14.03    107,814    11.44 
Second mortgages   7,179    0.75    8,410    0.89 
Multifamily   52,255    5.43    59,024    6.27 
Agriculture   8,066    0.84    7,483    0.79 
Total real estate loans   777,214    80.76    776,604    82.44 
Commercial loans   170,310    17.70    159,024    16.88 
Consumer installment loans   13,135    1.36    5,169    0.55 
All other loans   1,766    0.18    1,221    0.13 
Total loans  $962,425    100.00%  $942,018    100.00%

 

The Company held $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 September 30, 2018 and December 31, 2017. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $1.3 million and $824,000 at September 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 September 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.

 

 12 

 

 

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

 

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

Recorded

Investment (1)

  

Unpaid

Principal

Balance (2)

  

Related

Allowance

  

Average

Investment

  

Interest

Recognized

  

Average

Investment

  

Interest

Recognized

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

  

(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.

 

 13 

 

 

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

 

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

Recorded

Investment (1)

  

Unpaid

Principal

Balance (2)

  

Related

Allowance

  

Average

Investment

  

Interest

Recognized

  

Average

Investment

  

Interest

Recognized

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

  

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

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

 

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

 

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

 

 14 

 

 

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

 

   September 30, 2018 
  

30-89 Days

Past Due

   Nonaccrual  

Total Past

Due

   Current  

Total Loans

Receivable

 
Mortgage loans on real estate:                         
Residential 1-4 family  $635   $1,530   $2,165   $214,038   $216,203 
Commercial   84    2,243    2,327    356,163    358,490 
Construction and land development   3    4,610    4,613    130,408    135,021 
Second mortgages               7,179    7,179 
Multifamily   2,559        2,559    49,696    52,255 
Agriculture               8,066    8,066 
Total real estate loans   3,281    8,383    11,664    765,550    777,214 
Commercial loans   512    506    1,018    169,292    170,310 
Consumer installment loans   22    5    27    13,108    13,135 
All other loans               1,766    1,766 
Total loans  $3,815   $8,894   $12,709   $949,716   $962,425 

 

   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 

 

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

 

 

   Three Months Ended September 30, 2018 
   June 30, 2018  

Provision

Allocation

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

 

 15 

 

 

   Three Months Ended September 30, 2017 
   June 30, 2017  

Provision

Allocation

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

 

   Nine Months Ended September 30, 2018 
   December 31, 2017  

Provision

Allocation

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

 

   Nine Months Ended September 30, 2017 
   December 31, 2016  

Provision

Allocation

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

 

 16 

 

 

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

 

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

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

   Total  

Individually

Evaluated for

Impairment

  

Collectively

Evaluated for

Impairment

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

 

   December 31, 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 

 

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

 

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

 

 17 

 

 

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

 

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

 

   September 30, 2018 
   Pass  

Special

Mention

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

 

   December 31, 2017 
   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 

 

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 24 and 23 loans that met the definition of a TDR at September 30, 2018 and 2017, respectively.

 

During the three months ended September 30, 2018, the Company modified one commercial real estate loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $126,000. During the nine months ended September 30, 2018, the Company modified one multifamily loan and one commercial real estate loan that were considered to be TDRs, which had a total pre- and post-modification balance of $2.6 million and $126,000, respectively. The Company restructured the terms for both loans.

 

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

 

 18 

 

 

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three and nine months ended September 30, 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 September 30, 2018, the Company had 1-4 family mortgages in the amount of $112.3 million pledged to the Federal Home Loan Bank with a lendable collateral value of $89.8 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 September 30, 2018 and December 31, 2017, the outstanding contractual balance of the PCI loans was $63.4 million and $71.0 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

   September 30, 2018   December 31, 2017 
   Amount   % of PCI
Loans
   Amount   % of PCI
Loans
 
Mortgage loans on real estate:                    
Residential 1-4 family  $35,053    89.55%  $39,805    89.79%
Commercial   759    1.94    547    1.23 
Construction and land development   1,350    3.45    1,588    3.58 
Second mortgages   1,735    4.43    2,136    4.82 
Multifamily   247    0.63    257    0.58 
Total real estate loans   39,144    100.00    44,333    100.00 
Total PCI loans  $39,144    100.00%  $44,333    100.00%

 

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

 

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

 

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

 

 19 

 

 

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

 

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

 

   September 30, 2018   December 31, 2017 
Residential 1-4 family  $665   $486 
Commercial   15    15 
Construction and land development   1,052    2,290 
Total other real estate owned  $1,732   $2,791 

 

At September 30, 2018, the Company had $507,000 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 September 30, 2018 and December 31, 2017 (dollars in thousands):

 

   September 30, 2018   December 31, 2017 
         
NOW  $147,026   $157,037 
MMDA   128,277    143,363 
Savings   94,972    93,980 
Time deposits less than or equal to $250,000   491,044    437,810 
Time deposits over $250,000   113,715    110,546 
Total interest bearing deposits  $975,034   $942,736 

 

 20 

 

 

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 nine months ended September 30, 2018 and 2017 (dollars in thousands):

 

   Three months ended September 30, 2018 
   Unrealized
Gain (Loss)
on Securities
   Defined
Benefit
Pension Plan
   Gain (Loss) on
Cash Flow
Hedge
   Total Other
Comprehensive
Income (Loss)
 
                 
Beginning balance  $(1,517)  $(1,048)  $302   $(2,263)
Other comprehensive loss before reclassifications   (968)   -    (27)   (995)
Amounts reclassified from AOCI   (53)   -    -    (53)
Net current period other comprehensive loss   (1,021)   -    (27)   (1,048)
Ending balance  $(2,538)  $(1,048)  $275   $(3,311)

 

   Three months ended September 30, 2017 
   Unrealized
Gain (Loss)
on Securities
   Defined
Benefit
Pension Plan
   Gain (Loss) on
Cash Flow
Hedge
   Total Other
Comprehensive
Income (Loss)
 
                 
Beginning balance  $769   $(756)  $(25)  $(12)
Other comprehensive income before reclassifications   43    -    35    78 
Amounts reclassified from AOCI   (31)   -    -    (31)
Net current period other comprehensive income   12    -    35    47 
Ending balance  $781   $(756)  $10   $35 

 

   Nine months ended September 30, 2018 
  

Unrealized

Gain (Loss)

on Securities

  

Defined

Benefit

Pension Plan

  

Gain (Loss) on

Cash Flow

Hedge

  

Total Other

Comprehensive

Income (Loss)

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

 

   Nine months ended September 30, 2017 
  

Unrealized

Gain (Loss)

on Securities

  

Defined

Benefit

Pension Plan

  

Gain (Loss) on

Cash Flow

Hedge

  

Total Other

Comprehensive

Income (Loss)

 
                 
Beginning balance  $(410)  $(767)  $(46)  $(1,223)
Other comprehensive income before reclassifications   1,309    11    56    1,376 
Amounts reclassified from AOCI   (118)   -    -    (118)
Net current period other comprehensive income   1,191    11    56    1,258 
Ending balance  $781   $(756)  $10   $35 

 

 21 

 

 

The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 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    
   September 30, 2018   September 30, 2017    
Securities available for sale:             
Unrealized gains on securities available for sale  $(68)  $(48)  Gain on securities transactions, net
Related tax expense   15    17   Income tax expense
   $(53)  $(31)  Net of tax
              
Details about AOCI Components  Amount Reclassified from AOCI  

Affected Line Item in the Unaudited

Consolidated Statement of Income

   Nine months ended    
   September 30, 2018   September 30, 2017    
Securities available for sale:             
Unrealized gains on securities available for sale  $(82)  $(180)  Gain on securities transactions, net
Related tax expense   18    62   Income tax expense
   $(64)  $(118)  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 September 30, 2018.

 

 22 

 

 

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):

 

   September 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  $26,037   $1,984   $24,053   $- 
U.S. Gov’t sponsored agencies   8,424    -    8,424    - 
State, county and municipal   115,744    1,447    114,297    - 
Corporate and other bonds   9,651    -    9,651    - 
Mortgage backed – U.S. Gov’t agencies   14,254    -    14,254    - 
Mortgage backed – U.S. Gov’t sponsored agencies   26,493    1,387    25,106    - 
Total investment securities available for sale   200,603    4,818    195,785    - 
Cash flow hedge   353    -    353    - 
Total assets at fair value  $200,956   $4,818   $196,138   $- 
Total liabilities at fair value  $-   $-   $-   $- 

 

   December 31, 2017 
   Total   Level 1   Level 2   Level 3 
Investment securities available for sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $27,183   $-   $27,183   $- 
U.S. Gov’t sponsored agencies   9,278    -    9,278    - 
State, county and municipal   125,760    332    125,428    - 
Corporate and other bonds   7,460    -    7,460    - 
Mortgage backed – U.S. Gov’t agencies   18,515    -    18,515    - 
Mortgage backed – U.S. Gov’t sponsored agencies   16,638    -    16,638    - 
Total investment securities available for sale   204,834    332    204,502    - 
Cash flow hedge   177    -    177    - 
Total assets at fair value  $205,011   $332   $204,679   $- 
Total liabilities at fair value  $-   $-   $-   $- 

 

Investment securities available for sale

 

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

 

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 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.

 

 23 

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

   September 30, 2018 
   Total   Level 1   Level 2   Level 3 
Impaired loans  $8,825   $   $   $8,825 
Bank premises and equipment held for sale   1,252        700    552 
Other real estate owned   1,732            1,732 
Total assets at fair value  $11,809   $   $700   $11,109 
Total liabilities at fair value  $   $   $   $ 

 

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

 

Impaired loans

 

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At September 30, 2018 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 without further adjustment for unobservable inputs, 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. At September 30, 2018 and December 31, 2017, the Level 3 weighted average adjustments related to impaired loans were 19.0% and 38.0%, respectively. In instances where an appraisal received subsequent to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

 

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.

 

 24 

 

 

Other real estate owned

 

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

 

Fair Value of Financial Instruments

 

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

 

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):

 

   September 30, 2018 
   Carrying Value  

Estimated Fair

Value

   Level 1   Level 2   Level 3 
Financial assets:                         
Securities held to maturity  $43,559   $43,195   $   $43,195   $ 
Loans, net of allowance   953,432    958,935            958,935 
PCI loans, net of allowance   39,007    42,519            42,519 
                          
Financial liabilities:                         
Interest bearing deposits   975,034    973,178        973,178     
Borrowings   67,944    67,591        67,591     
                          

 

   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     

 

 25 

 

 

Note 9. Earnings Per Common Share

 

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

 

  

Net Income

(Numerator)

  

Weighted Average

Common Shares

(Denominator)

  

Per Common

Share Amount

 
For the three months September 30, 2018               
Basic EPS  $3,955    22,115   $0.18 
Effect of dilutive stock awards       512    (0.01)
Diluted EPS  $3,955    22,627   $0.17 
                
For the three months ended September 30, 2017               
Basic EPS  $2,416    22,041   $0.11 
Effect of dilutive stock awards       501     
Diluted EPS  $2,416    22,542   $0.11 
                
For the nine months ended September 30, 2018               
Basic EPS  $10,331    22,095   $0.47 
Effect of dilutive stock awards       481    (0.01)
Diluted EPS  $10,331    22,576   $0.46 
                
For the nine months ended September 30, 2017               
Basic EPS  $7,843    22,000   $0.36 
Effect of dilutive stock awards       491    (0.01)
Diluted EPS  $7,843    22,491   $0.35 

 

There were no antidilutive exclusions from the computation of diluted earnings per common share for the three and nine months ended September 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 nine months ended September 30, 2018 and 2017 (dollars in thousands):

 

   Three months ended   Nine months ended 
   September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017 
Interest cost  $39   $39   $117   $117 
Expected return on plan assets   (59)   (70)   (177)   (210)
Amortization of prior service cost   1    1    3    3 
Recognized net loss due to settlement                
Recognized net actuarial loss   15    12    45    36 
Net periodic benefit income  $(4)  $(18)  $(12)  $(54)

 

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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 September 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 nine months ended September 30, 2018 and 2017. The fair value of the Company’s cash flow hedge was an unrealized gain of $353,000 and $177,000 at September 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.

 

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Interchange and ATM fees

 

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

 

Brokerage fees and commissions

 

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

 

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

 

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

 

Note 13. Bank Premises and Equipment Held for Sale

 

The Company closed its Prince Street branch located in Tappahannock, Virginia as of the close of business June 29, 2018. From a historical perspective, when the Company opened its Dillard branch, also in Tappahannock, the Company’s intention was to consolidate the Prince Street branch into the newer Dillard branch, which was built as a larger and modern banking facility. The Company is now following through with its intention.

 

The Prince Street branch building is being marketed for sale. The book value of $552,000 reflects the lower of cost or fair market value at September 30, 2018 and has been classified as held for sale on the consolidated balance sheet.

 

Also included in bank premises and equipment held for sale is a piece of land the Company was holding as a possible future branch site. The Company has decided not to pursue that location and is marketing the property. The book value of $700,000 reflects the lower of cost or fair market value at September 30, 2018.

 

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

 

The following discussion and analysis of the financial condition at September 30, 2018 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, 2018 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

OVERVIEW

 

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 25 full-service offices in Virginia and Maryland.  

 

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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.

 

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through branch growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.

 

The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing expenses, professional fees, transactions involving bank-owned property, and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

 

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

·the interest rate environment;

 

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

 

·real estate values;

 

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

 

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

 

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

 

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

 

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

 

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

 

·consumer profiles and spending and savings habits;

 

·levels of fraud in the banking industry;

 

·the level of attempted cyber attacks in the banking industry;

 

·the securities and credit markets;

 

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

 

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

 

·inflation;

 

·technology; and

 

·legislative and regulatory requirements.

 

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

 

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

 

CRITICAL ACCOUNTING POLICIES

 

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

 

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

 

Allowance for Loan Losses on Loans

 

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

 

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

 

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

Large groups of smaller balance homogeneous loans are evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

 

Accounting for Certain Loans Acquired in a Transfer

 

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

 

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

 

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

 

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, and is not recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

 

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Other Real Estate Owned

 

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

 

Income Taxes

 

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

 

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no such interest or penalties during the three and nine months ended September 30, 2018 and 2017. Under FASB ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable; therefore, no allowance is required.

 

The Company and the Bank are subject to U.S. federal income tax as well as Virginia and Maryland state income tax. All years from 2014 through 2017 are open to examination by the respective tax authorities.

 

RESULTS OF OPERATIONS

 

Overview

 

Net income of $4.0 million for the third quarter of 2018 was an increase of $1.5 million, or 63.7%, over net income of $2.4 million for the third quarter of 2017. Pre-tax net income increased $1.6 million, or 46.9%, in the third quarter of 2018. Interest and dividend income increased by $1.8 million in the third quarter of 2018 compared with the same period in 2017, driven by interest and fees on loans, which increased $1.8 million. Noninterest income increased by $213,000 year-over-year, and noninterest expenses declined by $248,000. Offsetting these increases was an increase in income tax expense, which was $26,000 greater, year-over-year, based on the increase in pre-tax income but lessened by the reduction in the corporate tax rate, from 34% to 21%.

 

Net income was $10.3 million for the first nine months of 2018 compared with $7.8 million for the same period in 2017. This is an increase of $2.5 million, or 31.7%. Increases were in interest and dividend income, which increased by $4.2 million, or 10.6%, and in noninterest income, which increased by $351,000, or 11.6%. Also positively affecting earnings were a reduction of $150,000 in the provision for loan losses and a decrease of $389,000 in income tax expense when comparing the two periods. Offsetting these increases to net income were an increase of $1.9 million in interest expense and an increase of $629,000 in noninterest expense. By comparing pre-tax income for the two periods, most of the effect of the Tax Cuts and Jobs Act of 2017 is eliminated. This comparison reflects that income before income taxes increased by $2.1 million, or 19.9%, for the first nine months of 2018 compared with the same period in 2017.

 

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Net Interest Income

 

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

 

Net interest income increased $954,000, or 8.7%, from the third quarter of 2017 to the third quarter of 2018. Net interest income was $12.0 million in the third quarter of 2018 compared with $11.0 million for the same period in 2017. Interest and dividend income increased $1.8 million, or 13.1%, over this time period. The increase in interest and dividend income was generated by an increase of $70.3 million, or 5.8%, in the level of earning assets. The yield on earning assets increased from 4.51% in the third quarter of 2017 to 4.76% in the third quarter of 2018. The average balance of loans, excluding PCI loans, increased $96.3 million, or 11.1%, from $869.5 million in the third quarter of 2017 to $965.8 million in the third quarter of 2018. Interest income on securities increased $119,000 and was $1.9 million in the third quarter of 2018, compared to $1.8 million in the third quarter of 2017. On a tax-equivalent basis, the yield on investment securities was 3.21% in the third quarter of 2018, based on a 21% tax rate, and 3.10% in the third quarter of 2017, based on a 34% tax rate. Interest on deposits in other banks increased by $29,000 in the third quarter of 2018 over the same period in 2017 primarily due to an increase in the return on those balances from 1.40% in 2017 to 2.45% in 2018.

 

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

 

Interest expense increased $801,000, or 33.9%, when comparing the third quarter of 2017 and the third quarter of 2018. Interest expense on deposits increased $646,000, or 31.5%, as the average balance of interest bearing deposits increased $33.5 million, or 3.6%. The increase in deposit cost was driven by an increase in the average balance of demand – interest bearing accounts, which increased a combined $4.2 million year-over-year. Likewise, the cost of these balances increased $13,000, from 0.40% to 0.42%, over the same time frame. Higher cost time deposit average balances increased over the comparison period by $25.7 million, and expense on this category increased by $631,000, resulting in an increase in cost from 1.19% to 1.56%. The average balance of FHLB and other borrowings increased $13.1 million year-over-year, and there was an increase in the rate paid, from 1.57% in the third quarter of 2017 to 1.98% in the third quarter of 2018. This resulted in an increase in the expense of this wholesale funding source of $144,000, to $452,000 in the third quarter of 2018. The average balance of FHLB and other borrowings was $90.8 million in the third quarter of 2018. Overall, the Company’s cost of interest bearing liabilities increased 26 basis points, from 0.92% in the third quarter of 2017 to 1.18% in the third quarter of 2018.

 

The tax-equivalent net interest margin increased three basis points, from 3.74% in the third quarter of 2018 to 3.77% in the third quarter of 2018. The interest spread decreased from 3.59% to 3.58% over the same time period.  Net interest margin increased despite the decrease in interest spread because growth in the average balance of earning assets of $70.3 million was partially funded by growth in the average balance of noninterest bearing deposits of $18.9 million.

 

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

 

Interest expense of $8.6 million represented an increase of $1.9 million in the first nine months of 2018 compared with the same period in 2017. Average interest bearing liabilities increased $50.9 million, or 5.0%, as loan growth was fueled by an increase of $42.0 million, or 16.6%, in the average balance of demand - interest bearing accounts. This has allowed more expensive time deposit balances to decrease, on average, by $11.4 million, or 2.0%, resulting in a $33.1 million increase in the average balance of total deposits.

 

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

  

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

 

(Dollars in thousands)  Three months ended September 30, 2018   Three months ended September 30, 2017 
           Average           Average 
   Average   Interest   Rates   Average   Interest   Rates 
   Balance   Income/   Earned/   Balance   Income/   Earned/ 
   Sheet   Expense   Paid   Sheet   Expense   Paid 
ASSETS:                        
Loans  $965,763   $11,893    4.89%  $869,501   $10,127    4.62%
PCI loans   39,614    1,265    12.49    47,358    1,423    11.76 
Total loans   1,005,377    13,158    5.19    916,859    11,550    5.00 
Interest bearing bank balances   15,244    94    2.45    18,333    65    1.40 
Federal funds sold   91    -    1.92    105    1    1.21 
Securities (taxable)   179,738    1,364    3.04    182,703    1,171    2.56 
Securities (tax exempt)(1)   73,985    669    3.62    86,106    912    4.24 
Total earning assets   1,274,435    15,285    4.76    1,204,106    13,699    4.51 
Allowance for loan losses   (9,219)             (9,523)          
Non-earning assets   94,804              89,935           
Total assets  $1,360,020             $1,284,518           
                               
LIABILITIES AND SHAREHOLDERS' EQUITY                              
                               
Demand - interest bearing  $284,407    297    0.42   $280,253    284    0.40 
Savings   94,487    62    0.26    90,774    60    0.26 
Time deposits   593,450    2,340    1.56    567,800    1,709    1.19 
Total interest bearing deposits   972,344    2,699    1.10    938,827    2,053    0.87 
Short-term borrowings   2,163    13    2.32    381    2    1.67 
FHLB and other borrowings   90,761    452    1.98    77,617    308    1.57 
Total interest bearing liabilities   1,065,268    3,164    1.18    1,016,825    2,363    0.92 
Noninterest bearing deposits   157,252              138,330           
Other liabilities   6,509              5,395           
Total liabilities   1,229,029              1,160,550           
Shareholders' equity   130,991              123,968           
                               
Total liabilities and shareholders' equity  $1,360,020             $1,284,518           
Net interest earnings       $12,121             $11,336      
Interest spread             3.58%             3.59%
Net interest margin             3.77%             3.74%
                               
Tax equivalent adjustment:                              
Securities       $140             $310      

 

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

 

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