Community Bankers Trust Corp - FORM 10-Q

Attached files

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EX-32.1 - EX-32.1 - Community Bankers Trust Corp	esxb-20200331ex32106d5b2.htm
EX-31.2 - EX-31.2 - Community Bankers Trust Corp	esxb-20200331ex31264c9ab.htm
EX-31.1 - EX-31.1 - Community Bankers Trust Corp	esxb-20200331ex3113a7b4b.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

	For the quarterly period ended March 31, 2020

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)

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


Title of each class	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 par value	ESXB	The NASDAQ Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit. such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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	☑
Non-accelerated filer	☐	Smaller reporting company	☑
		Emerging growth company	☐

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

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

At March 31, 2020, there were 22,317,420 shares of the Company’s common stock outstanding.

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COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10‑Q

March 31, 2020

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3. Defaults upon Senior Securities	44
Item 4. Mine Safety Disclosures	44
Item 5. Other Information	44
Item 6. Exhibits	44
SIGNATURES	45

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2020 AND DECEMBER 31, 2019

(dollars in thousands, except per share data)


	March 31, 2020		December 31, 2019*
ASSETS
Cash and due from banks	$	15,406	$	16,976
Interest bearing bank deposits		14,960		11,708
Total cash and cash equivalents		30,366		28,684

Securities available for sale, at fair value		202,711		186,969
Securities held to maturity, at cost (fair value of $25,485 and $36,633, respectively)		24,649		35,733
Equity securities, restricted, at cost		8,458		8,855
Total securities		235,818		231,557

Loans held for sale		2,470		501

Loans		1,079,229		1,058,323
Purchased credit impaired (PCI) loans		30,275		32,528
Total loans		1,109,504		1,090,851
Allowance for loan losses (loans of $11,819 and $8,429, respectively; PCI loans of $156 and $156, respectively)		(11,975)		(8,585)
Net loans		1,097,529		1,082,266

Bank premises and equipment, net		29,065		29,472
Bank premises and equipment held for sale		1,589		1,589
Right-of-use lease assets		6,234		6,472
Other real estate owned		4,506		4,527
Bank owned life insurance		29,514		29,340
Other assets		16,449		16,432
Total assets	$	1,453,540	$	1,430,840

LIABILITIES
Deposits:
Noninterest bearing	$	188,327	$	178,584
Interest bearing		1,032,731		984,864
Total deposits		1,221,058		1,163,448

Federal funds purchased		—		24,437
Federal Home Loan Bank borrowings		58,333		68,500
Trust preferred capital notes		4,124		4,124
Lease liabilities		6,513		6,737
Other liabilities		8,044		8,115
Total liabilities		1,298,072		1,275,361

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 22,317,420 and 22,422,621 shares issued and outstanding, respectively)		223		224
Additional paid in capital		150,219		150,728
Retained earnings		2,856		2,562
Accumulated other comprehensive income		2,170		1,965
Total shareholders’ equity		155,468		155,479
Total liabilities and shareholders’ equity	$	1,453,540	$	1,430,840

*Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

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COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

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


	Three months ended
	March 31, 2020		March 31, 2019
Interest and dividend income
Interest and fees on loans	$	13,086	$	12,419
Interest and fees on PCI loans		1,097		1,293
Interest on deposits in other banks		69		96
Interest and dividends on securities
Taxable		1,351		1,522
Nontaxable		343		476
Total interest and dividend income		15,946		15,806
Interest expense
Interest on deposits		3,419		3,234
Interest on borrowed funds		289		447
Total interest expense		3,708		3,681
Net interest income		12,238		12,125
Provision for loan losses		3,300		—
Net interest income after provision for loan losses		8,938		12,125
Noninterest income
Service charges and fees		672		609
Loss on securities transactions, net		(39)		(14)
Gain on sale of other loans		11		—
Income on bank owned life insurance		174		181
Mortgage loan income		221		62
Other		296		176
Total noninterest income		1,335		1,014
Noninterest expense
Salaries and employee benefits		5,152		5,381
Occupancy expenses		827		930
Equipment expenses		372		381
FDIC assessment		125		150
Data processing fees		592		568
Other real estate expense, net		6		(8)
Other operating expenses		1,520		1,438
Total noninterest expense		8,594		8,840
Income before income taxes		1,679		4,299
Income tax expense		264		796
Net income	$	1,415	$	3,503
Net income per share — basic	$	0.06	$	0.16
Net income per share — diluted	$	0.06	$	0.16
Weighted average number of shares outstanding
Basic		22,400		22,141
Diluted		22,591		22,430

See accompanying notes to unaudited consolidated financial statements

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COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)


	Three months ended
	March 31, 2020		March 31, 2019
Net income	$	1,415	$	3,503

Other comprehensive income:
Unrealized gain on investment securities:
Change in unrealized gain on investment securities		782		2,204
Tax related to unrealized gain on investment securities		(172)		(485)
Reclassification adjustment for loss on securities sold		39		14
Tax related to realized loss on securities sold		(9)		(3)
Cash flow hedge:
Change in unrealized loss on cash flow hedge		(557)		(94)
Tax related to cash flow hedge		122		20
Total other comprehensive income		205		1,656
Total comprehensive income	$	1,620	$	5,159

See accompanying notes to unaudited consolidated financial statements

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COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars and shares in thousands)


								Accumulated
				Additional		Retained		Other
	Common Stock			Paid in		Earnings		Comprehensive
	Shares	Amount		Capital		(Deficit)		Income (Loss)		Total


Balance January 1, 2019	22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock	6		—		54		—		—		54
Exercise and issuance of employee stock options	31		1		298		—		—		299
Net income	—		—		—		3,503		—		3,503
Dividends paid on common stock	—		—		—		(665)		—		(665)
Other comprehensive income	—		—		—		—		1,656		1,656
Balance March 31, 2019	22,169	$	222	$	149,115	$	(7,406)	$	377	$	142,308

Balance January 1, 2020	22,423	$	224	$	150,728	$	2,562	$	1,965	$	155,479
Issuance of common stock	6		—		54		—		—		54
Exercise and issuance of employee stock options	4		—		242		—		—		242
Stock purchased under stock repurchase program	(116)		(1)		(805)		—		—		(806)
Net income	—		—		—		1,415		—		1,415
Dividends paid on common stock	—		—		—		(1,121)		—		(1,121)
Other comprehensive income	—		—		—		—		205		205
Balance March 31, 2020	22,317	$	223	$	150,219	$	2,856	$	2,170	$	155,468

See accompanying notes to unaudited consolidated financial statements

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COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands)


	March 31, 2020		March 31, 2019
Operating activities:
Net income	$	1,415	$	3,503
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		483		545
Leased asset amortization		238		231
Stock-based compensation expense		285		266
Tax benefit of exercised stock options		(6)		(31)
Amortization of purchased loan premium		160		60
Provision for loan losses		3,300		—
Amortization of security premiums and accretion of discounts, net		233		281
Net loss on sale of securities		39		14
Net gain on sale and valuation of other real estate owned		(6)		(50)
Net gain on sale of loans		(11)		—
Originations of mortgages held for sale		(8,668)		(1,976)
Proceeds from sales of mortgages held for sale		6,699		1,726
Increase in bank owned life insurance investment		(174)		(181)
Changes in assets and liabilities:
Decrease (increase) in other assets		174		(366)
Decrease in accrued expenses and other liabilities		(846)		(58)
Net cash provided by operating activities		3,315		3,964

Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		9,893		19,264
Proceeds from calls/maturities/paydowns of held to maturity securities		11,065		626
Proceeds from sales of restricted equity securities		1,700		—
Purchase of available for sale securities		(25,069)		(10,682)
Purchase of restricted equity securities		(1,302)		(626)
Proceeds from sale of other real estate owned		27		316
Net increase in loans		(19,527)		(4,351)
Principal recoveries of loans previously charged off		184		77
Purchase of premises and equipment, net		(76)		(199)
Purchase small business investment company fund investment		(250)		(262)
Proceeds from sale of loans		632		705
Net cash (used in) provided by investing activities		(22,723)		4,868

Financing activities:
Net increase in deposits		57,610		3,148
Net decrease in federal funds purchased		(24,437)		(19,440)
Net (decrease) increase in short-term Federal Home Loan Bank borrowings		(10,000)		10,000
Proceeds from long-term Federal Home Loan Bank borrowings		40,000		—
Payments on long-term Federal Home Loan Bank borrowings		(40,167)		(375)
Proceeds from issuance of common stock		11		87
Cash dividends paid		(1,121)		(665)
Repurchase of common stock		(806)		—
Net cash provided by (used in) financing activities		21,090		(7,245)

Net increase in cash and cash equivalents		1,682		1,587

Cash and cash equivalents:
Beginning of the period		28,684		34,219
End of the period	$	30,366	$	35,806

Supplemental disclosures of cash flow information:
Interest paid	$	3,689	$	3,512
Income taxes paid		—		439
Transfers of loans to other real estate owned		—		392
Right-of-use lease assets in exchange for lease liability		—		7,408

See accompanying notes to unaudited consolidated financial statements

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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 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates two loan production offices.

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, 2019. 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 March 31, 2020, the statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 2020. Results for the three month period ended March 31 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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.

Recent Accounting Developments

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the “agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the coronavirus (COVID-19) pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310-40, Receivables – Troubled Debt Restructurings by Creditors, a restructuring of debt constitutes a troubled debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the impact of COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments as of December 31, 2019. This interagency guidance is expected to

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have a material impact on the Company’s financial statements; however, due to the uncertainties regarding the economic effects of COVID-19, this impact cannot be quantified at this time.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at March 31, 2020 and December 31, 2019 were as follows (dollars in thousands):


	March 31, 2020
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	7,497	$	3	$	—	$	7,500
U.S. Government agencies		21,452		67		(715)		20,804
State, county and municipal		98,168		4,120		(99)		102,189
Mortgage backed securities		45,118		1,959		(80)		46,997
Asset backed securities		13,568		4		(646)		12,926
Corporate bonds		12,388		35		(128)		12,295
Total Securities Available for Sale	$	198,191	$	6,188	$	(1,668)	$	202,711

Securities Held to Maturity
State, county and municipal	$	24,649	$	847	$	(11)	$	25,485
Total Securities Held to Maturity	$	24,649	$	847	$	(11)	$	25,485


	December 31, 2019
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Government agencies	$	22,104	$	51	$	(219)	$	21,936
State, county and municipal		95,467		3,167		(42)		98,592
Mortgage backed securities		48,045		808		(113)		48,740
Asset backed securities		11,637		49		(82)		11,604
Corporate bonds		6,016		84		(3)		6,097
Total Securities Available for Sale	$	183,269	$	4,159	$	(459)	$	186,969

Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(12)	$	9,988
State, county and municipal		25,733		913		(1)		26,645
Total Securities Held to Maturity	$	35,733	$	913	$	(13)	$	36,633

The amortized cost and fair value of securities at March 31, 2020 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.


	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,727	$	2,727	$	25,502	$	25,665
Due after one year through five years		15,442		16,012		68,115		69,161
Due after five years through ten years		6,229		6,463		83,115		86,513
Due after ten years		251		283		21,459		21,372
Total securities	$	24,649	$	25,485	$	198,191	$	202,711

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Proceeds from sales and calls of securities were $6.2 million and $16.8 million during the three months ended March 31, 2020 and 2019, respectively. Gains and losses on securities transactions are determined using the specific identification method. Gross realized gains and losses on securities transactions during the three months ended March 31, 2020 and 2019 were as follows (dollars in thousands):


	Three months ended
	March 31, 2020		March 31, 2019
Gross realized gains	$	29	$	53
Gross realized losses		(68)		(67)
Net securities loss	$	(39)	$	(14)

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 months ended March 31, 2020 and 2019.

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 March 31, 2020 and December 31, 2019 were as follows (dollars in thousands):


	March 31, 2020
	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. Government agencies	$	6,628	$	(380)	$	6,155	$	(335)	$	12,783	$	(715)
State, county and municipal		5,834		(88)		306		(11)		6,140		(99)
Mortgage backed securities		8,977		(79)		437		(1)		9,414		(80)
Asset backed securities		9,675		(635)		599		(11)		10,274		(646)
Corporate bonds		10,512		(128)		—		—		10,512		(128)
Total	$	41,626	$	(1,310)	$	7,497	$	(358)	$	49,123	$	(1,668)

Securities Held to Maturity
State, county and municipal	$	1,765	$	(11)	$	—	$	—	$	1,765	$	(11)
Total	$	1,765	$	(11)	$	—	$	—	$	1,765	$	(11)


	December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Government agencies	$	6,396	$	(102)	$	8,020	$	(117)	$	14,416	$	(219)
State, county and municipal		7,088		(32)		308		(10)		7,396		(42)
Mortgage backed securities		11,001		(40)		4,287		(73)		15,288		(113)
Asset backed securities		4,861		(74)		625		(8)		5,486		(82)
Corporate bonds		248		(3)		—		—		248		(3)
Total	$	29,594	$	(251)	$	13,240	$	(208)	$	42,834	$	(459)

Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,988	$	(12)	$	9,988	$	(12)
State, county and municipal		31		—		622		(1)		653		(1)
Total	$	31	$	—	$	10,610	$	(13)	$	10,641	$	(13)

The unrealized losses (impairments) in the investment portfolio at March 31, 2020 and December 31, 2019 are generally a result of market fluctuations of interest rates that occur daily. A lack of liquidity in the bond market at March 31, 2020 caused market values to decline, thereby increasing unrealized losses. The unrealized losses are from 65 securities at March 31, 2020. Of those, 43 are investment grade, have U.S. government agency guarantees, or are backed

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by the full faith and credit of local municipalities throughout the United States. Ten investment grade asset-backed securities comprised of student loan pools included in corporate obligations and 12 corporate bonds make up the remaining securities with unrealized losses at March 31, 2020. 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 $46.1 million and $47.3 million at March 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $5.5 million and $5.8 million at March 31, 2020 and December 31, 2019, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of March 31, 2020 and December 31, 2019, there were no securities purchased from a single issuer, other than U.S. Treasury securities 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 March 31, 2020 and December 31, 2019 were comprised of the following (dollars in thousands):


	March 31, 2020				December 31, 2019
	Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	219,735	20.36	%	$	223,538	21.12	%
Commercial		410,438	38.03			396,858	37.50
Construction and land development		149,833	13.88			146,566	13.85
Second mortgages		5,954	0.55			6,639	0.63
Multifamily		76,206	7.06			72,978	6.90
Agriculture		7,038	0.65			8,346	0.79
Total real estate loans		869,204	80.53			854,925	80.79
Commercial loans		198,544	18.40			191,183	18.06
Consumer installment loans		10,446	0.97			11,163	1.05
All other loans		1,035	0.10			1,052	0.10
Total loans	$	1,079,229	100.00	%	$	1,058,323	100.00	%

The Company held $12.1 million and $12.7 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 March 31, 2020 and December 31, 2019, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $974,000 and $1.0 million at March 31, 2020 and December 31, 2019, 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. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

At March 31, 2020 and December 31, 2019, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB 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 FASB ASC 310.

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The following table summarizes information related to impaired loans as of and for the three months ended March 31, 2020 (dollars in thousands):


							Three months ended
	March 31, 2020						March 31, 2020
			Unpaid
	Recorded		Principal		Related		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,160	$	1,485	$	—	$	1,322	$	10
Commercial		3,132		3,835		—		3,179		34
Construction and land development		328		328		—		328		—
Multifamily		—		—		—		1,231		—
Total real estate loans		4,620		5,648		—		6,060		44
Subtotal impaired loans with no valuation allowance		4,620		5,648		—		6,060		44
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,883		2,286		490		1,690		11
Commercial		97		559		24		238		2
Construction and land development		1,450		1,551		136		749		—
Total real estate loans		3,430		4,396		650		2,677		13
Commercial loans		1,629		1,629		909		1,042		4
Consumer installment loans		10		10		3		9		—
Subtotal impaired loans with a valuation allowance		5,069		6,035		1,562		3,728		17
Total:
Mortgage loans on real estate:
Residential 1‑4 family		3,043		3,771		490		3,012		21
Commercial		3,229		4,394		24		3,417		36
Construction and land development		1,778		1,879		136		1,077		—
Multifamily		—		—		—		1,231		—
Total real estate loans		8,050		10,044		650		8,737		57
Commercial loans		1,629		1,629		909		1,042		4
Consumer installment loans		10		10		3		9		—
Total impaired loans	$	9,689	$	11,683	$	1,562	$	9,788	$	61

⁽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.

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The following table summarizes information related to impaired loans as of December 31, 2019 and for the three months ended March 31, 2019 (dollars in thousands):


							Three months ended
	December 31, 2019						March 31, 2019
			Unpaid
	Recorded		Principal		Related		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Recognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,483	$	1,850	$	—	$	1,555	$	11
Commercial		3,226		3,966		—		3,435		35
Construction and land development		328		328		—		—		—
Multifamily		2,463		2,463		—		2,555		—
Total real estate loans		7,500		8,607		—		7,545		46
Subtotal impaired loans with no valuation allowance		7,500		8,607		—		7,545		46
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,498		1,808		380		2,067		20
Commercial		378		876		87		1,143		4
Construction and land development		48		147		11		4,336		—
Total real estate loans		1,924		2,831		478		7,546		24
Commercial loans		454		460		105		2,157		9
Consumer installment loans		7		7		1		3		—
Subtotal impaired loans with a valuation allowance		2,385		3,298		584		9,706		33
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,981		3,658		380		3,622		31
Commercial		3,604		4,842		87		4,578		39
Construction and land development		376		475		11		4,336		—
Multifamily		2,463		2,463		—		2,555		—
Total real estate loans		9,424		11,438		478		15,091		70
Commercial loans		454		460		105		2,157		9
Consumer installment loans		7		7		1		3		—
Total impaired loans	$	9,885	$	11,905	$	584	$	17,251	$	79

⁽¹⁾

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

⁽²⁾

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

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 March 31, 2020 and December 31, 2019, is set forth in the table below (dollars in thousands):


	March 31, 2020		December 31, 2019
Nonaccrual loans	$	5,172	$	5,292
Trouble debt restructure and still accruing		4,517		4,593
Total impaired	$	9,689	$	9,885

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 months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, estimated interest income of $97,000 and $223,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

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The following tables present an age analysis of past due status of loans by category as of March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,268	$	—	$	1,456	$	2,724	$	217,011	$	219,735
Commercial		1,689		—		657		2,346		408,092		410,438
Construction and land development		—		—		1,778		1,778		148,055		149,833
Second mortgages		459		—		—		459		5,495		5,954
Multifamily		—		—		—		—		76,206		76,206
Agriculture		—		—		—		—		7,038		7,038
Total real estate loans		3,416		—		3,891		7,307		861,897		869,204
Commercial loans		731		—		1,270		2,001		196,543		198,544
Consumer installment loans		27		—		11		38		10,408		10,446
All other loans		—		—		—		—		1,035		1,035
Total loans	$	4,174	$	—	$	5,172	$	9,346	$	1,069,883	$	1,079,229


	December 31, 2019
	30‑89 Days		90+ Days Past				Total Past				Total Loans
	Past Due		Due and Accruing		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,308	$	—	$	1,378	$	2,686	$	220,852	$	223,538
Commercial		552		—		1,006		1,558		395,300		396,858
Construction and land development		166		—		376		542		146,024		146,566
Second mortgages		229		—		—		229		6,410		6,639
Multifamily		—		—		2,463		2,463		70,515		72,978
Agriculture		—		—		—		—		8,346		8,346
Total real estate loans		2,255		—		5,223		7,478		847,447		854,925
Commercial loans		1,085		946		62		2,093		189,090		191,183
Consumer installment loans		41		—		7		48		11,115		11,163
All other loans		—		—		—		—		1,052		1,052
Total loans	$	3,381	$	946	$	5,292	$	9,619	$	1,048,704	$	1,058,323

Activity in the allowance for loan losses on loans by segment for the three months ended March 31, 2020 and 2019 is presented in the following tables (dollars in thousands):


	Three Months Ended March 31, 2020
			Provision
	December 31, 2019		Allocation		Charge-offs		Recoveries		March 31, 2020
Mortgage loans on real estate:
Residential 1‑4 family	$	2,685	$	234	$	—	$	16	$	2,935
Commercial		2,196		2,000		—		44		4,240
Construction and land development		1,044		227		—		83		1,354
Second mortgages		79		(10)		—		1		70
Multifamily		248		19		—		—		267
Agriculture		38		7		—		—		45
Total real estate loans		6,290		2,477		—		144		8,911
Commercial loans		1,980		582		(19)		3		2,546
Consumer installment loans		114		35		(75)		37		111
All other loans		7		1		—		—		8
Unallocated		38		205		—		—		243
Total loans	$	8,429	$	3,300	$	(94)	$	184	$	11,819

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	Three Months Ended March 31, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		March 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	855	$	—	$	203	$	3,339
Commercial		1,810		(32)		(277)		7		1,508
Construction and land development		1,161		43		(12)		18		1,210
Second mortgages		20		40		—		2		62
Multifamily		371		(10)		—		—		361
Agriculture		17		6		—		—		23
Total real estate loans		5,660		902		(289)		230		6,503
Commercial loans		1,894		291		(229)		2		1,958
Consumer installment loans		152		72		(60)		24		188
All other loans		12		(6)		—		—		6
Unallocated		1,265		(1,259)		—		—		6
Total loans	$	8,983	$	—	$	(578)	$	256	$	8,661

The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the possible economic impact COVID-19 may have on these borrowers. The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	490	$	2,445	$	2,935	$	3,043	$	216,692	$	219,735
Commercial		24		4,216		4,240		3,229		407,209		410,438
Construction and land development		136		1,218		1,354		1,778		148,055		149,833
Second mortgages		—		70		70		—		5,954		5,954
Multifamily		—		267		267		—		76,206		76,206
Agriculture		—		45		45		—		7,038		7,038
Total real estate loans		650		8,261		8,911		8,050		861,154		869,204
Commercial loans		909		1,637		2,546		1,629		196,915		198,544
Consumer installment loans		3		108		111		10		10,436		10,446
All other loans		—		8		8		—		1,035		1,035
Unallocated		—		243		243		—		—		—
Total loans	$	1,562	$	10,257	$	11,819	$	9,689	$	1,069,540	$	1,079,229

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	December 31, 2019
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	380	$	2,305	$	2,685	$	2,981	$	220,557	$	223,538
Commercial		87		2,109		2,196		3,604		393,254		396,858
Construction and land development		11		1,033		1,044		376		146,190		146,566
Second mortgages		—		79		79		—		6,639		6,639
Multifamily		—		248		248		2,463		70,515		72,978
Agriculture		—		38		38		—		8,346		8,346
Total real estate loans		478		5,812		6,290		9,424		845,501		854,925
Commercial loans		105		1,875		1,980		454		190,729		191,183
Consumer installment loans		1		113		114		7		11,156		11,163
All other loans		—		7		7		—		1,052		1,052
Unallocated		—		38		38		—		—		—
Total loans	$	584	$	7,845	$	8,429	$	9,885	$	1,048,438	$	1,058,323

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 $12.1 million and $12.7 million at March 31, 2020 and December 31, 2019, respectively.

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

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

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

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The following tables present the composition of loans by credit quality indicator at March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	210,368	$	8,135	$	1,232	$	—	$	219,735
Commercial		357,877		50,505		2,056		—		410,438
Construction and land development		143,507		4,548		1,778		—		149,833
Second mortgages		5,257		697		—		—		5,954
Multifamily		76,206		—		—		—		76,206
Agriculture		6,938		100		—		—		7,038
Total real estate loans		800,153		63,985		5,066		—		869,204
Commercial loans		157,026		37,372		4,146		—		198,544
Consumer installment loans		10,414		22		10		—		10,446
All other loans		1,018		17		—		—		1,035
Total loans	$	968,611	$	101,396	$	9,222	$	—	$	1,079,229


	December 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	219,210	$	2,964	$	1,364	$	—	$	223,538
Commercial		391,251		3,188		2,419		—		396,858
Construction and land development		145,782		408		376		—		146,566
Second mortgages		6,096		543		—		—		6,639
Multifamily		70,515		—		2,463		—		72,978
Agriculture		8,098		248		—		—		8,346
Total real estate loans		840,952		7,351		6,622		—		854,925
Commercial loans		185,123		2,770		3,290		—		191,183
Consumer installment loans		11,140		16		7		—		11,163
All other loans		1,052		—		—		—		1,052
Total loans	$	1,038,267	$	10,137	$	9,919	$	—	$	1,058,323

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 18 and 25 loans that met the definition of a TDR at March 31, 2020 and 2019, respectively.

The Company had no loan modifications considered to be TDRs during the three months ended March 31, 2020 and 2019.

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 the three months ended March 31, 2020. During the three months ended March 31, 2019, one loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.6 million.

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 March 31, 2020, the Company had 1‑4 family mortgages in the amount of $102.0 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $86.2 million.

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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 March 31, 2020 and December 31, 2019, the outstanding contractual balance of the PCI loans was $50.6 million and $53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):


	March 31, 2020				December 31, 2019
			% of PCI				% of PCI
	Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	27,283	90.12	%	$	29,465	90.58	%
Commercial		474	1.57			490	1.51
Construction and land development		1,136	3.75			1,172	3.60
Second mortgages		1,157	3.82			1,169	3.59
Multifamily		225	0.74			232	0.72
Total real estate loans		30,275	100.00			32,528	100.00
Total PCI loans	$	30,275	100.00	%	$	32,528	100.00	%

There was no activity in the allowance for loan losses on PCI loans for the three months ended March 31, 2020 and 2019.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020				December 31, 2019
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	27,283	$	156	$	29,465
Commercial		—		474		—		490
Construction and land development		—		1,136		—		1,172
Second mortgages		—		1,157		—		1,169
Multifamily		—		225		—		232
Total real estate loans		156		30,275		156		32,528
Total PCI loans	$	156	$	30,275	$	156	$	32,528

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The change in the accretable yield balance for the three months ended March 31, 2020 and the year ended December 31, 2019, is as follows (dollars in thousands):



Balance, January 1, 2019	$	38,107
Accretion		(6,010)
Reclassification from nonaccretable difference		1,369
Balance, December 31, 2019	$	33,466
Accretion		(1,091)
Reclassification to nonaccretable difference		(509)
Balance, March 31, 2020	$	31,866

The PCI loans were not classified as nonperforming assets as of March 31, 2020, 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 March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019
Residential 1‑4 family	$	21	$	21
Construction and land development		4,485		4,506
Total other real estate owned	$	4,506	$	4,527

At March 31, 2020, the Company had $434,000 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 March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019

Interest bearing checking	$	166,163	$	—
NOW		—		170,532
MMDA		123,455		120,841
Savings		99,394		96,570
Time deposits less than or equal to $250,000		506,739		477,461
Time deposits over $250,000		136,980		119,460
Total interest bearing deposits	$	1,032,731	$	984,864

Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

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Note 7. Accumulated Other Comprehensive Income

The following tables present activity net of tax in accumulated other comprehensive income (AOCI) for the three months ended March 31, 2020 and 2019 (dollars in thousands):


	Three months ended March 31, 2020
	Unrealized		Defined		Gain (Loss) on		Total Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)

Beginning balance	$	2,887	$	(886)	$	(36)	$	1,965
Other comprehensive income (loss) before reclassifications		610		—		(435)		175
Amounts reclassified from AOCI		30		—		—		30
Net current period other comprehensive income (loss)		640		—		(435)		205
Ending balance	$	3,527	$	(886)	$	(471)	$	2,170


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

Beginning balance	$	(618)	$	(857)	$	196	$	(1,279)
Other comprehensive income (loss) before reclassifications		1,719		—		(74)		1,645
Amounts reclassified from AOCI		11		—		—		11
Net current period other comprehensive income (loss)		1,730		—		(74)		1,656
Ending balance	$	1,112	$	(857)	$	122	$	377

The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three months ended March 31, 2020 and 2019 (dollars in thousands):


					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Three months ended
	March 31, 2020		March 31, 2019
Securities available for sale:
Unrealized loss on securities available for sale	$	39	$	14	Loss on securities transactions, net
Related tax benefit		(9)		(3)	Income tax expense
	$	30	$	11	Net of tax

Note 8. Fair Values of Assets and Liabilities

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

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

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which

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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 March 31, 2020.

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):


	March 31, 2020
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,500	$	—	$	7,500	$	—
U.S. Government agencies		20,804		1,047		19,757		—
State, county and municipal		102,189		3,573		98,616		—
Mortgage backed securities		46,997		—		46,997		—
Asset backed securities		12,926		2,010		10,916		—
Corporate bonds		12,295		6,365		5,930		—
Total investment securities available for sale		202,711		12,995		189,716		—
Total assets at fair value	$	202,711	$	12,995	$	189,716	$	—
Cash flow hedge liability	$	601		—	$	601		—
Total liabilities at fair value	$	601	$	—	$	601	$	—


	December 31, 2019
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Government agencies	$	21,936	$	—	$	21,936	$	—
State, county and municipal		98,592		10,072		88,520		—
Mortgage backed securities		48,740		1,181		47,559		—
Asset backed securities		11,604		—		11,604		—
Corporate bonds		6,097		—		6,097		—
Total investment securities available for sale		186,969		11,253		175,716		—
Total assets at fair value	$	186,969	$	11,253	$	175,716	$	—
Cash flow hedge liability		44		—	$	44		—
Total liabilities at fair value	$	44	$	—	$	44	$	—

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). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

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The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020
	Total		Level 1		Level 2		Level 3
Impaired loans	$	4,341	$	—	$	—	$	4,341
Loans held for sale		2,470		—		2,470		—
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,506		—		—		4,506
Total assets at fair value	$	12,906	$	—	$	2,470	$	10,436
Total liabilities at fair value	$	—	$	—	$	—	$	—


	December 31, 2019
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,020	$	—	$	—	$	3,020
Loans held for sale		501		—		501		—
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,527		—		—		4,527
Total assets at fair value	$	9,637	$	—	$	501	$	9,136
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 March 31, 2020 and December 31, 2019, 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 deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. The Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the collateral. Therefore, the Company records impaired loans as nonrecurring Level 3. For the period ended March 31, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to impaired loans were 27.5% and 12.8%, respectively.

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Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

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

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value or fair value less estimated disposal costs. The Company may incur additional write-downs of OREO assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

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):


	March 31, 2020
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	24,649	$	25,485	$	—	$	25,485	$	—
Loans, net of allowance		1,067,410		1,076,569		—		—		1,076,569
PCI loans, net of allowance		30,119		38,091		—		—		38,091

Financial liabilities:
Interest bearing deposits		1,032,731		1,036,360		—		1,036,360		—
Borrowings		62,457		62,644		—		62,644		—

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	December 31, 2019
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	35,733	$	36,633	$	—	$	36,633	$	—
Loans, net of allowance		1,049,894		1,041,671		—		—		1,041,671
PCI loans, net of allowance		32,372		38,982		—		—		38,982

Financial liabilities:
Interest bearing deposits		984,864		985,853		—		985,853		—
Borrowings		72,624		72,457		—		72,457		—

Note 9. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three months ended March 31, 2020 and 2019 (dollars and shares in thousands, except per share data):


			Weighted Average
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Amount
For the three months ended March 31, 2020
Basic EPS	$	1,415	22,400	$	0.06
Effect of dilutive stock awards		—	191		—
Diluted EPS	$	1,415	22,591	$	0.06

For the three months ended March 31, 2019
Basic EPS	$	3,503	22,141	$	0.16
Effect of dilutive stock awards		—	289		—
Diluted EPS	$	3,503	22,430	$	0.16

Antidilutive shares issuable under awards or options of 568,000 and 585,000 were excluded from the computation of diluted earnings per share for the three months ended March 31, 2020 and 2019, 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 froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

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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 months ended March 31, 2020 and 2019 (dollars in thousands):


	Three months ended
	March 31, 2020		March 31, 2019
Interest cost	$	33	$	40
Expected return on plan assets		(54)		(53)
Amortization of prior service cost		1		1
Recognized net loss due to settlement		—		13
Recognized net actuarial loss		12		12
Net periodic (income) cost	$	(8)	$	13

Note 11. Cash Flow Hedge

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had interest rate swaps designated as cash flow hedges with total notional amounts of $10 million at each of March 31, 2020 and December 31, 2019. The swaps were entered into with a counterparty that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant. The Company had $530,000 and $180,000 of cash pledged as collateral at March 31, 2020 and December 31, 2019, 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 swaps as cash flow hedges, with the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. 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 highly effective for the three month periods ended March 31, 2020 and 2019. The Company recorded a fair value liability of $601,000 and $44,000 in other liabilities at March 31, 2020 and December 31, 2019, respectively. The net losses were recorded as a component of other comprehensive income net of associated tax effects.

Note 12. Revenue Recognition

The Company recognizes income in accordance with FASB ASU 2014‑09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. 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 this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service charges on deposit accounts

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

Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying

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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 months ended March 31, 2020 and 2019 (dollars in thousands):


	Three months ended
	March 31, 2020		March 31, 2019
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts	$	454	$	410
Interchange and ATM fees		218		199
Brokerage fees and commissions		72		96
Noninterest income (in-scope of Topic 606)		744		705
Noninterest income (out-of-scope of Topic 606)		591		309
Total noninterest income	$	1,335	$	1,014

Note 13. Leases

The Company accounts for leases in accordance with FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises. The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability. The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed. None of the Company’s current leases contain variable lease payment terms. The Company accounts for associated non-lease components separately.

The following table presents operating lease liabilities as of March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019

Gross lease liability	$	8,968	$	9,278
Less: imputed interest		(2,455)		(2,541)
Present value of lease liability	$	6,513	$	6,737

The weighted average remaining lease term and weighted average discount rate for operating leases at March 31, 2020 was 12.1 years and 4.66%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2019 was 12.0 years and 4.63%, respectively.

Maturities of the gross operating lease liability at March 31, 2020 are as follows (dollars in thousands):

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2020	$	921
2021		1,191
2022		600
2023		630
2024		573
Thereafter		5,053
Total of future payments	$	8,968

Operating lease costs and sublease rental income for the three months ended March 31, 2020 were $314,000 and $27,000, respectively. Operating lease costs and sublease rental income for the three months ended March 31, 2019 were $330,000 and $27,000, respectively.

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

The following discussion and analysis of the financial condition at March 31, 2020 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three months ended March 31, 2020 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, 2019.

OVERVIEW

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

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

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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 potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them

the interest rate environment;

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

real estate values;

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

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

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

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

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

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

consumer profiles and spending and savings habits;

levels of fraud in the banking industry;

the level of attempted cyber attacks in the banking industry;

the securities and credit markets;

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

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

inflation;

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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, 2019 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:

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.

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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.

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

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

RESULTS OF OPERATIONS

Overview

Coming off a strong end to the 2019 year, the Company began the first quarter of 2020 with good momentum but the quarter was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis. Specific events that

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impacted the Company’s financial results at the end of the first quarter, and will impact future financial results, include government mandated business closures and stay-at-home orders, which have transformed into the highest unemployment rate seen in the Company’s markets. In addition, unprecedented government stimulus programs and the uncertainties regarding how long the mandates will last have contributed to the unpredictability of the financial impacts that the Company may experience. The Company is focused on assessing the risks in its loan portfolio and working with our customers to minimize future losses. See below for additional discussion regarding trends and the potential effects of COVID-19.

Net income was $1.4 million for the first quarter of 2020, compared with net income of $3.5 million in the first quarter of 2019. Earnings per common share, basic and fully diluted, were $0.06 per share and $0.16 per share for the three months ended March 31, 2020 and 2019, respectively.

The decrease of $2.1 million, or 59.6%, in net income, for the first quarter of 2020 compared with the first quarter of 2019 was primarily the result of a provision for loan losses of $3.3 million in the first quarter of 2020 to reflect the business and market disruptions with respect to COVID-19. Additional discussion of the provision is presented below. Offsetting the decrease to net income were a decrease of $532,000 in income tax expenses, an increase of $321,000 in noninterest income, a decrease of $246,000 in noninterest expenses and an increase of $113,000 in net interest income.

Net Interest Income

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

Net interest income increased $113,000, or 0.9%, from the first quarter of 2019 to the first quarter of 2020. Net interest income was $12.2 million in the first quarter of 2020 compared with $12.1 million for the same period in 2019. Interest and dividend income increased $140,000, or 0.9%, over this time period. Interest and fees on loans increased by $667,000. This increase was mitigated by securities income, which declined $304,000, interest and fees on PCI loans, which declined $196,000, and interest on deposits in other banks, which decreased by $27,000. Interest on PCI loans was $1.1 million in the first quarter of 2020 compared with $1.3 million in the first quarter of 2019. The average balance of the PCI portfolio declined $6.5 million during the year-over-year comparison period. The increase in interest and fees on loans was generated by an increase of $66.2 million, or 6.6%, in the average balance of loans. A portion of this loan growth was a shift in the mix of earning assets, as securities average balances declined $21.9 million year over year. The average balance of total earning assets increased $40.1 million, or 3.1%, from the first quarter of 2019 to the first quarter of 2020. The yield on earning assets decreased from 4.95% in the first quarter of 2019 to 4.78% in the first quarter of 2020. The yield on earning assets was the culmination of decreases in the yield on loans, from 5.36% in the first quarter of 2019 to 5.19% in the first quarter of 2020, the tax-equivalent yield on securities, from 3.35% in the first quarter of 2019 to 3.08% in the first quarter of 2020, and the yield on interest bearing bank balances, from 2.70% to 1.68% year over year.

Interest expense increased $27,000, or 0.7%, when comparing the first quarter of 2019 and the first quarter of 2020. Interest expense on deposits increased $185,000, or 5.7%, as the average balance of interest bearing deposits increased $20.5 million, or 2.0%. This growth was primarily comprised of an increase of $9.2 million in the average balance of time deposits, which averaged $632.7 million in the first quarter of 2020. Interest-bearing demand deposits increased $12.5 million year over year and were $170.3 million, on average, in the first quarter of 2020. Offsetting these increases was a decrease in the average balance of savings and money market accounts of $1.3 million, to $219.7 million for the first quarter of 2020. The shift in deposit balances increased the cost of interest bearing deposits from 1.31% in the first quarter of 2019 to 1.34% in the first quarter of 2020.

FHLB and other borrowings decreased, on average, $6.4 million year over year, and there was a decrease in the rate paid, from 2.17% in the first quarter of 2019 to 1.58% in the first quarter of 2020. Overall, the Bank’s cost of interest bearing liabilities decreased two basis points, from 1.38% in the first quarter of 2019 to 1.36% in the first quarter of 2020.

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The tax-equivalent net interest margin decreased 13 basis points, from 3.81% in the first quarter of 2019 to 3.68% in the first quarter of 2020. Likewise, the interest spread decreased from 3.57% to 3.42% over the same time period. The decrease in the margin was precipitated by a greater decrease in the yield on earning assets of 17 basis points compared with a decline in the cost of interest bearing liabilities of only two basis points.

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 months ended March 31, 2020 and 2019. 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.


	Three months ended March 31, 2020						Three months ended March 31, 2019
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,065,268	$	13,086	4.93	%	$	999,047	$	12,419	5.04	%
PCI loans		31,311		1,097	13.87			37,783		1,293	13.69
Total loans		1,096,579		14,183	5.19			1,036,830		13,712	5.36
Interest bearing bank balances		16,455		69	1.68			14,376		96	2.70
Federal funds sold		141		—	1.06			55		—	2.41
Securities (taxable)		182,340		1,351	2.96			186,370		1,522	3.27
Securities (tax exempt) (1)		49,391		435	3.52			67,211		603	3.59
Total earning assets		1,344,906		16,038	4.78			1,304,842		15,933	4.95
Allowance for loan losses		(8,621)						(9,084)
Non-earning assets		105,540						96,770
Total assets	$	1,441,825					$	1,392,528

LIABILITIES AND SHAREHOLDERS’ EQUITY

Demand - interest bearing	$	170,279		94	0.22		$	157,773		87	0.22
Savings and money market		219,661		280	0.51			220,945		293	0.54
Time deposits		632,664		3,045	1.93			623,417		2,854	1.86
Total interest bearing deposits		1,022,604		3,419	1.34			1,002,135		3,234	1.31
Short-term borrowings		4,185		23	2.20			6,837		50	2.94
FHLB and other borrowings		66,796		266	1.58			73,214		397	2.17
Total interest bearing liabilities		1,093,585		3,708	1.36			1,082,186		3,681	1.38
Noninterest bearing deposits		175,871						160,496
Other liabilities		14,184						9,974
Total liabilities		1,283,640						1,252,656
Shareholders’ equity		158,185						139,872

Total liabilities and shareholders’ equity	$	1,441,825					$	1,392,528
Net interest earnings			$	12,330					$	12,252
Interest spread					3.42	%					3.57	%
Net interest margin					3.68	%					3.81	%

Tax equivalent adjustment:
Securities			$	92					$	127

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

Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition

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of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

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

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

The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio. There was a provision for loan losses on the loan portfolio, excluding PCI loans, of $3.3 million for the first quarter of 2020. This compares with no provision for loan losses in the first quarter of 2019.

The provision recorded in the first quarter of 2020 was due to the heightened risks associated with the loan portfolio that resulted from the economic impact of the rapidly evolving effects of the COVID-19 stay-at-home orders, business shut-downs and increased unemployment. The Company’s lenders reviewed each loan within the portfolio to identify those borrowers that management believed to be possibly impacted by the current state of the economy. Loans identified with increased risk were aggregated by loan type. This analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to the provision for loan losses for the quarter.

Due to the COVID-19 pandemic the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in our geographic territory. As of March 31, 2020, the Company identified the following categories of borrowers as being potentially at risk:


Category	% of Total Loans
Consumer	19.6	%
Lessors of commercial properties	15.7
Lessors of residential properties	12.2
Hotels and other lodging	4.8
Medical and care services	4.5
Food service and drinking	2.2
Retail stores	1.3
Personal services	1.0

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19. To date, the Company has granted relief in the form of various types of payment concessions, including interest only for up to six months or payment deferrals up to the same time frame for loans with outstanding balances of $141.2 million. In accordance with current regulatory guidance, none of these loans were deemed to be TDRs, as they were all current under their terms as of December 31, 2019.

The Company is also helping its customers and communities by participating in the Paycheck Protection Program (PPP). As of May 6, 2020, the Company has successfully received Small Business Administration (SBA) approval for 631 loans totaling $83.1 million, with the median size for all loans made being approximately $42,000.

With respect to the PCI portfolio, due to the stable nature of its performance and its declining balances over time as the portfolio amortizes, no provision was taken during either of the first quarter of 2020 or the first quarter of 2019. Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net recoveries of $90,000 in the first quarter of 2020, compared with net charge-offs of $322,000 in the first quarter of 2019. Total charge-offs were $94,000 for the first quarter of 2020 compared

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with $578,000 in the first quarter of 2019. Recoveries of previously charged-off loans were $184,000 for the first quarter of 2020 compared with $256,000 in the first quarter of 2019.

Noninterest Income

Noninterest income of $1.3 million in the first quarter of 2020 was an increase of $321,000, or 31.7%, over the first quarter of 2019. Mortgage loan income increased $159,000, or 256.5%, from $62,000 in the first quarter of 2019 to $221,000 in the first quarter of 2020. Other noninterest income was $296,000 in the first quarter of 2020 compared with $176,000 in the first quarter of 2019. The increase of $120,000 was primarily the result of a $64,000 gain on extinguishment of an FHLB borrowing combined with $90,000 in swap fee income, offset by a $24,000 decrease in brokerage fees and commissions. Service charges on deposit accounts of $672,000 in the first quarter of 2020 increased by $63,000, or 10.3%, year over year. This increase was primarily the result of an increase of $15.4 million in the average balance of noninterest bearing deposits and $12.5 million in interest-bearing demand deposits. However, the Company expects lower levels of service charge income in the next quarter due to higher levels of waived fees and an overall decrease in transaction volume arising from the economic impact of COVID-19. Offsetting these increases in noninterest income year over year were decreases of $25,000 in losses on securities transactions and $7,000 in income on bank owned life insurance.

Noninterest Expense

Noninterest expenses decreased $246,000, or 2.8%, when comparing the first quarter of 2020 to the same period in 2019. The largest component of the change was a reduction of $229,000 in salaries and employee benefits. During 2019, two branch offices were closed, which in turn reduced the number of full-time equivalent employees in 2020 compared with 2019. These closures also lowered occupancy expenses year over year, which declined $103,000, from $930,000 in the first quarter of 2019 to $827,000 in the first quarter of 2020. The Company expects a significant decrease in salaries and employee benefits in the next quarter as a result of loan cost deferrals related to the over 400 PPP loans processed to date. FDIC assessment of $125,000 in the first quarter of 2020 was a year-over-year decrease of $25,000. Offsetting these decreases were an increase in other operating expenses of $82,000, an increase of $24,000 in data processing expenses and an increase of $14,000 in other real estate expenses, net.

Income Taxes

Income tax expense was $264,000 for the three months ended March 31, 2020, compared with income tax expense $796,000 for the first quarter of 2019. The effective tax rate for the first quarter of 2020 was 15.7% compared with 18.5% for the first quarter of 2019. The decrease in the effective tax rate is a product of a higher percentage of tax free municipal income along with tax credits representing a higher percentage of overall tax expense for the first quarter of 2020.

FINANCIAL CONDITION

General

Total assets increased $22.7 million, or 1.6%, to $1.454 billion at March 31, 2020 when compared to December 31, 2019. Total loans, excluding PCI loans, were $1.079 billion at March 31, 2020, increasing $20.9 million, or 2.0%, from year end 2019. Total PCI loans were $30.3 million at March 31, 2020 versus $32.5 million at December 31, 2019.

Commercial real estate loans, the largest category of loans at $410.4 million, or 38.0% of gross loans outstanding, increased $13.6 million during the first quarter of 2020. Commercial loans grew $7.4 million and were $198.5 million at March 31, 2020. Multifamily loans, totaling $76.2 million, or 7.1% of total loans, increased $3.2 million during the first quarter of 2020. Construction and land development loans, totaling $149.8 million, grew by $3.3 million, or 2.2%. Residential 1 – 4 family loans declined by $3.8 million and ended the period at $219.7 million, or 20.4% of the portfolio. Agriculture loans secured by real estate declined by $1.3 million, or 15.7%, and totaled $7.0 million at March 31, 2020. Consumer installment loans decreased $717,000 during the first quarter of 2020, and second mortgages decreased $685,000 during the period.

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The Company’s securities portfolio, excluding restricted equity securities, increased $4.7 million since year end 2019 to $227.4 million at March 31, 2020. U.S. Treasury issues increased by $7.5 million during the first quarter of 2020. Corporate securities increased by $6.2 million during the period, while state, county and municipal securities available for sale increased by $3.6 million. Offsetting these increases was a decrease of $10.0 million in U.S. Government agency securities held to maturity. Net losses of $39,000 were recognized during the first quarter of 2020 compared with $14,000 in net losses in the first quarter of 2019. The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile.

The Company is required to account for the effect of changes in the fair value of securities available for sale (AFS) under FASB ASC 320, Investments – Debt and Equity Securities. The fair value of the AFS portfolio was $202.7 million at March 31, 2020 and $187.0 million at December 31, 2019. At March 31, 2020, the Company had a net unrealized gain on the AFS portfolio of $4.5 million compared with a net unrealized gain of $3.7 million at December 31, 2019. Municipal securities comprised 50.4% of the total AFS portfolio at March 31, 2020. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of $30.4 million and $28.7 million at March 31, 2020 and December 31, 2019, respectively. There were federal funds purchased of $24.4 million at December 31, 2019 with no federal funds purchased or sold at March 31, 2020. Interest bearing bank balances were $15.0 million at March 31, 2020 compared with $11.7 million at December 31, 2019.

Interest bearing deposits at March 31, 2020 were $1.033 billion, an increase of $47.9 million, or 4.9%, from December 31, 2019. Time deposits less than or equal to $250,000 increased by $29.3 million, or 6.1%, during the first quarter of 2020, the largest increase in the deposit categories. There were also increases of $17.5 million, or 14.7%, in time deposits over $250,000, $2.8 million in savings account balances and $2.6 million in money market deposit accounts. Interest-bearing checking accounts (formerly NOW accounts) declined $4.4 million during the first quarter of 2020 and were the only deposit category to decline. Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

FHLB advances were $58.3 million at March 31, 2020, compared with $68.5 million at December 31, 2019. The decrease of $10.2 million in FHLB advances and $24.4 million in Federal funds purchased in the first quarter of 2020 was replaced with strong retail deposit growth of $57.6 million.

Shareholders’ equity was $155.5 million at March 31, 2020 and $155.5 million at December 31, 2019. The ratio of shareholders equity to assets was 10.7% at March 31, 2020 and 10.9% at December 31, 2019. On January 22, 2020, the Company announced a share repurchase program of up to 1,000,000 shares of its common stock. During the first quarter of 2020, the Company repurchased 115,800 shares of common stock at a total cost of $809,000. The Company evaluates the value of the common stock and capital for regulatory purposes when considering repurchases under the program and, as a result, is not currently making any repurchases in the current economic environment.

Asset Quality – excluding PCI loans

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

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

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comparison to peer companies identified by regulatory agencies. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled $9.7 million at March 31, 2020 and net recoveries were $90,000 for the three months ended March 31, 2020. This compares with nonperforming assets of $10.8 million and net charge-offs of $879,000 for the year ended December 31, 2019.

Nonaccrual loans were $5.2 million at March 31, 2020, a $120,000 decrease from $5.3 million at December 31, 2019. The $120,000 decrease in nonaccrual loans since December 31, 2019 was the net result of $3.1 million in additions to nonaccrual loans and $3.2 million in reductions. The increase related mainly to one construction and land development relationship totaling $1.4 million and two commercial loans totaling $1.3 million. With respect to the reductions in nonaccrual loans, $47,000 were payments to existing credits, $22,000 were charge-offs, $3.0 million were paid off, and $159,000 returned to accruing status.

The allowance for loan losses, excluding PCI, equaled 228.5% of nonaccrual loans at March 31, 2020 compared with 159.3% at December 31, 2019. The ratio of nonperforming assets to loans and OREO decreased 12 basis points. The ratio was 0.89% at March 31, 2020 versus 1.01% at December 31, 2019.

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructures and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At March 31, 2020 and December 31, 2019, total impaired loans, excluding PCI loans, equaled $9.7 million and $9.9 million, respectively.

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


	March 31, 2020			December 31, 2019
Nonaccrual loans	$	5,172		$	5,292
Loans past due 90 days and accruing interest		—			946
Total nonperforming loans		5,172			6,238
OREO		4,506			4,527
Total nonperforming assets	$	9,678		$	10,765

Accruing troubled debt restructure loans	$	4,517		$	4,593

Balances
Specific reserve on impaired loans		1,562			584
General reserve related to unimpaired loans		10,257			7,845
Total allowance for loan losses		11,819			8,429

Average loans during the year, net of unearned income		1,065,268			1,023,861

Impaired loans		9,689			9,885
Non-impaired loans		1,069,540			1,048,438
Total loans, net of unearned income		1,079,229			1,058,323

Ratios
Allowance for loan losses to loans		1.10	%		0.80	%
Allowance for loan losses to nonaccrual loans		228.52			159.28
General reserve to non-impaired loans		0.96			0.75
Nonaccrual loans to loans		0.48			0.50
Nonperforming assets to loans and OREO		0.89			1.01
Net charge-offs (recoveries) to average loans		(0.01)			0.09

A further breakout of nonaccrual loans, excluding PCI loans, at March 30, 2020 and December 31, 2019 is below (dollars in thousands):


	March 31, 2020		December 31, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	1,456	$	1,378
Commercial		657		1,006
Construction and land development		1,778		376
Multifamily		—		2,463
Total real estate loans		3,891		5,223
Commercial loans		1,270		62
Consumer installment loans		11		7
Total loans	$	5,172	$	5,292

Asset Quality – PCI loans

Loans accounted for under FASB ASC 310‑30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash

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flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

Capital Requirements

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

Current repurchase activity under the Company’s stock repurchase program was suspended effective April 2, 2020. The sole reason for this suspension was due to the uncertainties surrounding COVID-19. The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers.

Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength.

Effective September 2018, the Federal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from $1 billion to $3 billion, thereby eliminating the Company’s consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level.

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on four definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The “leverage ratio” is tier 1 capital divided by total average assets.

The Bank’s ratio of total risk-based capital was 13.9% at each of March 31, 2020 and December 31, 2019. The tier 1 risk-based capital ratio was 12.9% at March 31, 2020 and 13.2% at December 31, 2019. The Bank’s tier 1 leverage ratio was 10.9% at March 31, 2020 and 11.0% at December 31, 2019. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 12.9% at March 31, 2020 and 13.2% at December 31, 2019.

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Bank does not maintain the full amount of the buffer. At March 31, 2020, the Bank had a capital conservation buffer of 5.9%.

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company’s

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management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at March 31, 2020 and December 31, 2019 was as follows (dollars in thousands):


	March 31, 2020			December 31, 2019
Cash and due from banks	$	15,406		$	16,976
Interest bearing bank deposits		14,960			11,708
Available for sale securities, at fair value, unpledged		173,170			157,225
Total liquid assets	$	203,536		$	185,909

Deposits and other liabilities	$	1,298,072		$	1,275,361
Ratio of liquid assets to deposits and other liabilities		15.68	%		14.58	%

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. The Company has a total of $55 million in this type of facility in the aggregate at March 31, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of March 31, 2020 and December 31, 2019, is as follows (dollars in thousands):


	March 31, 2020		December 31, 2019
Commitments with off-balance sheet risk:
Commitments to extend credit	$	220,070	$	210,086
Standby letters of credit		15,269		15,155
Total commitments with off-balance sheet risks	$	235,339	$	225,241

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

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

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

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had cash flow hedges with total notional amounts of $10 million at each of March 31, 2020 and December 31, 2019. The Company recorded a fair value liability of $601,000 and $44,000 in other liabilities, at March 31, 2020 and December 31, 2019, respectively. The Company’s cash flow hedges are deemed to be highly effective. Therefore, the net losses were recorded as a component of other comprehensive income (loss) in the Company’s consolidated statements of comprehensive income.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at March 31, 2020 (dollars in thousands):


	March 31, 2020
	%	$
Change in Yield curve
+400 bp	5.6	2,730
+300 bp	4.0	1,943
+200 bp	2.0	976
+100 bp	0.4	184
most likely	—	—
‑100 bp	0.1	42
‑200 bp	—	(5)
‑300 bp	(0.1)	(33)
‑400 bp	(0.1)	(33)

At March 31, 2020, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 5.6%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 0.1%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10‑Q, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer (the “Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a‑15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

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

Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. Furthermore, the Company has seen no effect on internal control over financial reporting related to its change to a mostly remote workforce due to COVID-19.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes to any of the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (Part I, Item 1A), other than the addition of the risk factor relating to the COVID-19 pandemic as set forth below.

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Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The coronavirus (COVID-19) pandemic, including measures that governmental authorities have taken to manage the public health effects of the pandemic, has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. These measures, together with voluntary changes in consumer behavior, have led to a substantial decrease in economic activity and a dramatic increase in unemployment. We cannot predict at this time the extent to which COVID-19 will continue to negatively affect us. The extent of any continued or future adverse effects of COVID-19 will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers and service providers, as well as other market participants, and additional actions taken by governmental authorities and other third parties in response to the pandemic.

We are prioritizing the safety of our customers and employees and have limited our branch activity to drive-through services or in-branch appointments. In addition, most of our employees are working remotely. If these measures are not effective in serving our customers or affect the productivity of our employees, they may lead to significant disruptions in our business operations.

Many of our third-party service providers have also been, and may further be, affected by the same factors that affect us and that, in turn, increase their own risks of business disruption or may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.

We are offering varying levels of credit relief to borrowers who are experiencing financial hardships related to COVID-19, including interest only payment concessions and payment deferrals. In addition, we are a certified and qualified SBA lender and are assisting our customers with their applications for the Paycheck Protection Program. These assistance efforts may adversely affect our revenue and results of operations. These government programs are complex, and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. In addition, if these assistance efforts are not effective in mitigating the effects of COVID-19 on borrowers, we may experience higher rates of default and increased credit losses in future periods.

Certain concentrations where we have credit exposure, including commercial and residential lessors, hotels, medical service providers and restaurants, have experienced significant operational challenges as a result of COVID-19. These negative effects may cause our commercial customers to be unable to pay their loans as they come due or decrease the value of collateral, which we expect would cause significant increases in our credit losses.

Our earnings and cash flows are dependent to a large degree on net interest income. Net interest income is significantly affected by market rates of interest. Significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions that the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to COVID-19, and resulting economic conditions.

The effects of COVID-19 on economic and market conditions have increased demands on our liquidity as we meet our customers’ and clients’ needs. We have suspended repurchases under our stock repurchase program to preserve capital and liquidity in order to support our customers and employees and, although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.

Governmental authorities have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Other negative effects of the COVID-19 pandemic that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that we will continue to be adversely

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affected until the pandemic subsides and the economy begins to recover. Further, COVID-19 may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019. Even after the pandemic subsides, it is possible that our markets continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.

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


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Program
January 1 - January 31, 2020	—	$	—	—	—
February 1 - February 29, 2020	20,800		8.60	20,800	979,200
March 1 - March 31, 2020	95,000		6.60	95,000	884,200
Total	115,800	$	7.60	115,800	884,200

(1) Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The repurchase program is authorized for a one year period.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
31.1		Rule 13a‑14(a)/15d‑14(a) Certification for Chief Executive Officer*
31.2		Rule 13a‑14(a)/15d‑14(a) Certification for Chief Financial Officer*
32.1		Section 1350 Certifications*
101		Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10‑Q for the period ended March 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

*Filed herewith.

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SIGNATURES

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

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)

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

Date: May 8, 2020

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

Date: May 8, 2020

Community Bankers Trust Corp - FORM 10-Q - May 8, 2020

Attached files

Community Bankers Trust Corp Reports