ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the past three years. The discussion and analysis are intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.
RECLASSIFICATION
In certain circumstances, reclassifications have been made to prior period information to conform to the
2018
presentation. There were no material reclassifications.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies followed by the Company conform with GAAP and they conform to general practices within the banking industry. The Company's critical accounting policies, which are summarized below, relate to (1) the allowance for loan losses, (2) mergers and acquisitions, (3) acquired loans with specific credit-related deterioration, (4) goodwill and intangible assets, (5) other real estate owned, (6) deferred tax assets and liabilities, (7) other-than-temporary impairment of securities, (8) the unfunded pension liability, and (9) derivative financial instruments. A summary of the Company's significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements.
The financial information contained within the Company's financial 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 earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method.
Allowance for Loan Losses
The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.
The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committee to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.
Risk grades are assigned as part of the loan origination process. From time to time, risk grades may be modified as warranted by the facts and circumstances surrounding the credit.
Calculation and analysis of the ALLL is prepared quarterly by the Finance Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.
The Company's ALLL has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.
The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, portfolio concentrations, regulatory, legal, competition, quality of loan review system, and value of underlying collateral. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for residential real estate and consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:
|
|
•
|
The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net
deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);
|
|
|
•
|
The loan's observable market price; or
|
|
|
•
|
The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.
|
The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates.
No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Bank will not have sizable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.
Mergers and Acquisitions
Business combinations are accounted for under the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") 805,
Business Combinations
, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions.
Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning, consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.
Acquired Loans with Specific Credit-Related Deterioration
Acquired loans with specific credit deterioration are accounted for by the Company in accordance with FASB ASC 310-30,
Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality
. Certain acquired loans, those for which specific credit-related deterioration since origination is identified, are recorded at the amount paid, such that there is no
carryover of the seller's allowance for loan losses. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.
Goodwill and Intangible Assets
The Company follows ASC 350,
Goodwill and Other Intangible Assets,
which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected June 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from 8.25 to 10 years, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s consolidated balance sheets. No indicators of impairment were identified during the years ended
December 31, 2018
,
2017
, or
2016
.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets 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 intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions.
Deferred Tax Assets and Liabilities
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed.
Other-than-temporary Impairment of Securities
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) the Company intends to sell the security or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that it will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.
Unfunded Pension Liability
The Company previously maintained a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. The Company froze its pension plan to new participants and converted its pension plan to a cash balance plan effective December 31, 2009. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the interest crediting rate, the estimated future return on plan assets and the anticipated rate of future salary increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.
Derivative Financial Instruments
The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consist of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in the
consolidated balance sheets. The effective portion of the gain or loss on the Company's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and is reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
ANNOUNCED ACQUISITION
On October 1, 2018, the Company and HomeTown announced the signing of the Merger Agreement pursuant to which HomeTown will merge with and into the Company in a transaction valued at approximately $95.6 million at the time of the announcement. The proposed combination will deepen the Company’s footprint in the Roanoke, Virginia metropolitan area and create a presence in the New River Valley with an office in Christiansburg, Virginia. Upon completion of the merger and with two office consolidations, the Company will have eight offices in the combined Roanoke/New River Valley market area. Based on reported financial results as of December 31, 2018, the combined company will have approximately $2.4 billion in assets, $1.8 billion in loans, and $2.0 billion in deposits across Virginia and North Carolina. Pursuant and subject to the terms of the Merger Agreement, as a result of the merger, the holders of shares of HomeTown common stock will receive 0.4150 shares of the Company’s common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger. Subject to customary closing conditions, including regulatory and shareholder approvals, the merger is expected to close early in the second quarter of 2019. Following completion of the merger, HomeTown Bank, will be merged with and into the Bank.
HomeTown Bank, which opened for business on November 14, 2005, offers a full range of banking services to small and medium-size businesses, real estate investors and developers, private investors, professionals and individuals. HomeTown Bank serves three markets including the Roanoke Valley, the New River Valley and Smith Mountain Lake through six branches, seven ATMs, HomeTown Mortgage and HomeTown Investments.
NON-GAAP PRESENTATIONS
Non-GAAP presentations are provided because the Company believes these may be valuable to investors. These include (1) the calculation of the efficiency ratio, (2) the analysis of net interest income presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, (3) return on average tangible equity, (4) tangible equity to tangible assets ratio, and (5) tangible book value.
The efficiency ratio is calculated by dividing noninterest expense excluding (1) gains or losses on the sale of other real estate owned ("OREO") and (2) merger related expenses by net interest income including tax equivalent income on nontaxable loans and securities and noninterest income excluding (x) gains or losses on securities and (y) gains or losses on sale of premises and equipment. The efficiency ratio for
2018
,
2017
, and
2016
was 59.57%, 60.89%, and 61.47%, respectively. The Company expects continued improvement in this ratio in 2019. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be construed as such. Management believes, however, such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company, in referring to its net income, is referring to income under GAAP. The components of the efficiency ratio calculation are summarized in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Efficiency Ratio
|
|
|
|
|
|
Noninterest expense
|
$
|
44,246
|
|
|
$
|
42,883
|
|
|
$
|
39,801
|
|
Subtract: loss on sale OREO
|
(44
|
)
|
|
(164
|
)
|
|
(228
|
)
|
Subtract: merger related expenses
|
(872
|
)
|
|
—
|
|
|
—
|
|
|
$
|
43,330
|
|
|
$
|
42,719
|
|
|
$
|
39,573
|
|
|
|
|
|
|
|
Net interest income
|
$
|
59,094
|
|
|
$
|
55,747
|
|
|
$
|
49,854
|
|
Tax equivalent adjustment
|
556
|
|
|
1,339
|
|
|
1,846
|
|
Noninterest income
|
13,274
|
|
|
14,227
|
|
|
13,505
|
|
Subtract: gain on securities
|
(123
|
)
|
|
(812
|
)
|
|
(836
|
)
|
Add/Subtract: (gain)/loss on sale of fixed assets
|
(60
|
)
|
|
(344
|
)
|
|
9
|
|
|
$
|
72,741
|
|
|
$
|
70,157
|
|
|
$
|
64,378
|
|
|
|
|
|
|
|
Efficiency ratio
|
59.57
|
%
|
|
60.89
|
%
|
|
61.47
|
%
|
Net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21% for 2018 and 35% for 2017 and 2016. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income
|
|
|
|
|
|
Non-GAAP measures:
|
|
|
|
|
|
Interest income - loans
|
$
|
60,159
|
|
|
$
|
55,581
|
|
|
$
|
48,224
|
|
Interest income - investments and other
|
9,165
|
|
|
8,796
|
|
|
9,792
|
|
Interest expense - deposits
|
(8,086
|
)
|
|
(5,794
|
)
|
|
(5,103
|
)
|
Interest expense - customer repurchase agreements
|
(164
|
)
|
|
(142
|
)
|
|
(5
|
)
|
Interest expense - other short-term borrowings
|
(22
|
)
|
|
(31
|
)
|
|
(5
|
)
|
Interest expense - long-term borrowings
|
(1,402
|
)
|
|
(1,324
|
)
|
|
(1,203
|
)
|
Total net interest income
|
$
|
59,650
|
|
|
$
|
57,086
|
|
|
$
|
51,700
|
|
Less non-GAAP measures:
|
|
|
|
|
|
Tax benefit realized on non-taxable interest income - loans
|
$
|
(192
|
)
|
|
$
|
(305
|
)
|
|
$
|
(253
|
)
|
Tax benefit realized on non-taxable interest income - municipal securities
|
(364
|
)
|
|
(1,034
|
)
|
|
(1,593
|
)
|
GAAP measures
|
$
|
59,094
|
|
|
$
|
55,747
|
|
|
$
|
49,854
|
|
Return on average tangible common equity is calculated by dividing net income available to common shareholders by average common equity.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Return on average equity (GAAP basis)
|
|
10.56
|
%
|
|
7.34
|
%
|
Impact of excluding average goodwill and other intangibles
|
|
2.93
|
%
|
|
2.25
|
%
|
Return on average tangible equity (non-GAAP)
|
|
13.49
|
%
|
|
9.59
|
%
|
Tangible equity to tangible assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Equity to assets ratio
|
|
11.95
|
%
|
|
11.49
|
%
|
Impact of excluding goodwill and other intangibles
|
|
(2.17
|
)%
|
|
(2.25
|
)%
|
Tangible equity to tangible assets ratio
|
|
9.78
|
%
|
|
9.24
|
%
|
The Company presents book value per share (period-end shareholders' equity divided by period-end common shares outstanding) and tangible book value per share. In calculating tangible book value, the Company excludes goodwill and other intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Book value per share (GAAP basis)
|
|
$
|
25.52
|
|
|
$
|
24.13
|
|
Impact of excluding goodwill and other intangibles
|
|
(5.14
|
)
|
|
(5.21
|
)
|
Tangible book value per share (non-GAAP)
|
|
$
|
20.38
|
|
|
$
|
18.92
|
|
RESULTS OF OPERATIONS
Net Income
Net income for
2018
was $22,579,000 compared to $15,249,000 for
2017
, an increase of $7,330,000 or 48.1%. Basic earnings per share were $2.60 for
2018
compared to $1.76 for
2017
. Diluted earnings per share were $2.59 for
2018
compared to $1.76 for
2017
. This net income produced for
2018
a return on average assets of 1.24%, a return on average equity of 10.56%, and a return on average tangible equity of 13.49%.
Earnings for 2018 were positively impacted by increased net interest income, resulting mostly from higher yields on the loan portfolio and greater loan volume. Earnings also increased due to a significant reduction in the loan loss provision. The need for a loan loss provision was reduced by three factors: loan balances, continued strong asset quality metrics, and improvements in various qualitative factors used in computing the allowance for loan losses. Lastly benefiting earnings was the substantial decrease in the corporate tax rate. The corporate tax rate reduction from 35% to 21%, enacted into law by the Tax Reform Act in late 2017, became effective in 2018.
Net income for
2017
was $15,249,000 compared to $16,301,000 for
2016
, a decrease of $1,052,000 or 6.5%. Basic and diluted earnings per share were $1.76 for
2017
compared to $1.89 for
2016
. This net income produced for
2017
a return on average assets of 0.87%, a return on average equity of 7.34%, and a return on average tangible equity of 9.59%.
Although the corporate tax rate reduction from 35% to 21% became effective in 2018, the enactment required companies to revalue their deferred tax assets at the new tax rate in 2017. Accordingly, in December 2017 the Company recognized a $2.7 million charge ($0.31 per share) to its deferred tax asset and a corresponding increase in income tax expense.
Earnings for
2018
,
2017
, and
2016
were favorably impacted by the 2011 acquisition of MidCarolina Financial Corporation ("MidCarolina") and the 2015 acquisition of MainStreet. The financial impact of the mergers was mostly a significant increase in earning assets.
Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The 2011 acquisition of MidCarolina and the 2015 acquisition of MainStreet impacted net interest income positively for
2018
,
2017
, and
2016
through increased earning assets.
The following discussion of net interest income is presented on a taxable equivalent basis to facilitate performance comparisons among various taxable and tax-exempt assets, such as certain state and municipal securities. A tax rate of 21% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent basis for 2018, and a tax rate of 35% was used for 2017 and 2016. Net interest income divided by average earning assets is referred to as the net interest margin. The net interest spread represents the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. All references in this section relate to average yields and rates and average asset and liability balances during the periods discussed.
Net interest income on a taxable equivalent basis increased $2,564,000, or 4.5%, in
2018
from
2017
, following a $5,386,000, or 10.4%, increase in
2017
from
2016
. The increase in net interest income in
2018
was primarily due to increased volumes of earning assets related to organic growth and increasing market interest rates.
Yields on loans were 4.51% in
2018
compared to 4.39% in
2017
. Cost of funds was 0.82% in
2018
compared to 0.64% in
2017
. Between
2018
and
2017
, deposit rates for demand accounts remained the same at 0.02%, money market accounts increased to 0.89% from 0.50%, and time deposits increased to 1.20% from 1.05%. The increase in money market rates was related mainly to high dollar volume commercial and municipal customer accounts. Management regularly reviews deposit pricing and attempts to keep costs as low as possible, while remaining competitive. The net interest margin was 3.49% for
2018
, 3.50% for
2017
, and 3.52% for
2016
.
During 2008, the Federal Open Market Committee ("FOMC") of the FRB reduced the federal funds rate seven times from 4.25% to 0.25%, where it remained, unchanged, through mid-December 2015. On December 17, 2015, the FOMC raised the target federal funds rate from 0.25% to 0.50%. On December 15, 2016, the FOMC raised the target federal funds rate from 0.50% to 0.75%. The FOMC raised the target federal funds rate by 0.25% on each of March 15, June 14, and December 13, 2017, ending the year at 1.50%. In 2018, the FOMC raised the target federal funds rate by 0.25% on each of March 21, June 13, September 26, and December 19, ending the year at 2.50%. The increase in rates is expected to have a nominal positive impact on net interest income. Given recent economic and geopolitical events in late 2018 and early 2019, it is possible that the federal funds rate may be unchanged at year end 2019 compared to year end 2018.
Net interest income on a taxable equivalent basis increased $5,386,000, or 10.4%, in
2017
from
2016
, following a $421,000 or 0.8% increase in
2016
from
2015
. The increase in net interest income in
2017
was primarily due to increased volumes of earning assets related to organic growth.
Yields on loans were 4.39% in
2017
compared to 4.54% in
2016
. Cost of funds was 0.64% in
2017
compared to 0.60% in
2016
. Between
2017
and
2016
, deposit rates for demand accounts decreased to 0.02% from 0.05%, money market accounts increased to 0.50% from 0.18%, and time deposits decreased to 1.05% from 1.14%. The net interest margin was 3.50% for
2017
, 3.52% for
2016
, and 3.69% for
2015
.
The following presentation is an analysis of net interest income and related yields and rates, on a taxable equivalent basis, for the last three years. Nonaccrual loans are included in average balances. Interest income on nonaccrual loans, if recognized, is recorded on a cash basis or when the loan returns to accrual status.
Net Interest Income Analysis
(in thousands, except yields and rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
Interest Income/Expense
|
|
Average Yield/Rate
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
264,241
|
|
|
$
|
229,239
|
|
|
$
|
198,326
|
|
|
$
|
10,579
|
|
|
$
|
8,829
|
|
|
$
|
7,856
|
|
|
4.00
|
%
|
|
3.85
|
%
|
|
3.96
|
%
|
Real estate
|
1,063,950
|
|
|
1,031,558
|
|
|
859,721
|
|
|
49,275
|
|
|
46,400
|
|
|
39,763
|
|
|
4.63
|
|
|
4.50
|
|
|
4.63
|
|
Consumer
|
4,676
|
|
|
4,652
|
|
|
5,230
|
|
|
305
|
|
|
352
|
|
|
605
|
|
|
6.52
|
|
|
7.57
|
|
|
11.57
|
|
Total loans
|
1,332,867
|
|
|
1,265,449
|
|
|
1,063,277
|
|
|
60,159
|
|
|
55,581
|
|
|
48,224
|
|
|
4.51
|
|
|
4.39
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
121,923
|
|
|
97,670
|
|
|
96,009
|
|
|
2,708
|
|
|
1,849
|
|
|
1,674
|
|
|
2.22
|
|
|
1.89
|
|
|
1.74
|
|
Mortgage-backed and CMOs
|
109,048
|
|
|
82,042
|
|
|
79,720
|
|
|
2,467
|
|
|
1,725
|
|
|
1,635
|
|
|
2.26
|
|
|
2.10
|
|
|
2.05
|
|
State and municipal
|
85,061
|
|
|
105,869
|
|
|
160,279
|
|
|
2,399
|
|
|
3,781
|
|
|
5,647
|
|
|
2.82
|
|
|
3.57
|
|
|
3.52
|
|
Other securities
|
14,950
|
|
|
15,796
|
|
|
15,953
|
|
|
718
|
|
|
707
|
|
|
560
|
|
|
4.80
|
|
|
4.48
|
|
|
3.51
|
|
Total securities
|
330,982
|
|
|
301,377
|
|
|
351,961
|
|
|
8,292
|
|
|
8,062
|
|
|
9,516
|
|
|
2.51
|
|
|
2.68
|
|
|
2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in other banks
|
45,434
|
|
|
65,027
|
|
|
55,410
|
|
|
873
|
|
|
734
|
|
|
276
|
|
|
1.92
|
|
|
1.13
|
|
|
0.50
|
|
Total interest earning assets
|
1,709,283
|
|
|
1,631,853
|
|
|
1,470,648
|
|
|
69,324
|
|
|
64,377
|
|
|
58,016
|
|
|
4.06
|
|
|
3.95
|
|
|
3.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets
|
118,375
|
|
|
126,159
|
|
|
127,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,827,658
|
|
|
$
|
1,758,012
|
|
|
$
|
1,598,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
$
|
234,857
|
|
|
$
|
217,833
|
|
|
$
|
216,521
|
|
|
49
|
|
|
43
|
|
|
99
|
|
|
0.02
|
|
|
0.02
|
|
|
0.05
|
|
Money market
|
393,321
|
|
|
335,085
|
|
|
239,262
|
|
|
3,505
|
|
|
1,668
|
|
|
432
|
|
|
0.89
|
|
|
0.50
|
|
|
0.18
|
|
Savings
|
132,182
|
|
|
125,157
|
|
|
118,144
|
|
|
40
|
|
|
38
|
|
|
47
|
|
|
0.03
|
|
|
0.03
|
|
|
0.04
|
|
Time
|
374,152
|
|
|
383,444
|
|
|
396,801
|
|
|
4,492
|
|
|
4,045
|
|
|
4,525
|
|
|
1.20
|
|
|
1.05
|
|
|
1.14
|
|
Total deposits
|
1,134,512
|
|
|
1,061,519
|
|
|
970,728
|
|
|
8,086
|
|
|
5,794
|
|
|
5,103
|
|
|
0.71
|
|
|
0.55
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements
|
18,401
|
|
|
46,335
|
|
|
46,832
|
|
|
164
|
|
|
142
|
|
|
5
|
|
|
0.89
|
|
|
0.31
|
|
|
0.01
|
|
Other short-term borrowings
|
1,149
|
|
|
3,158
|
|
|
656
|
|
|
22
|
|
|
31
|
|
|
5
|
|
|
1.91
|
|
|
0.98
|
|
|
0.76
|
|
Long-term borrowings
|
27,874
|
|
|
36,887
|
|
|
37,640
|
|
|
1,402
|
|
|
1,324
|
|
|
1,203
|
|
|
5.03
|
|
|
3.59
|
|
|
3.20
|
|
Total interest bearing liabilities
|
1,181,936
|
|
|
1,147,899
|
|
|
1,055,856
|
|
|
9,674
|
|
|
7,291
|
|
|
6,316
|
|
|
0.82
|
|
|
0.64
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
421,527
|
|
|
392,663
|
|
|
330,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
10,374
|
|
|
9,643
|
|
|
9,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
213,821
|
|
|
207,807
|
|
|
202,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
1,827,658
|
|
|
$
|
1,758,012
|
|
|
$
|
1,598,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
3.31
|
%
|
|
3.34
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
3.50
|
%
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (taxable equivalent basis)
|
|
|
|
|
59,650
|
|
|
57,086
|
|
|
51,700
|
|
|
|
|
|
|
|
|
Less: Taxable equivalent adjustment
(1)
|
|
|
|
|
556
|
|
|
1,339
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
|
$
|
59,094
|
|
|
$
|
55,747
|
|
|
$
|
49,854
|
|
|
|
|
|
|
|
|
|
______________________
(1) Calculated using the 21% statutory tax rate in 2018 and the 35% statutory tax rate in 2017 and 2016, respectively, due to tax rate change.
The following table presents the dollar amount of changes in interest income and interest expense, and distinguishes between changes resulting from fluctuations in average balances of interest earning assets and interest bearing liabilities (volume), and changes resulting from fluctuations in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately (dollars in thousands):
Changes in Net Interest Income (Rate / Volume Analysis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 vs. 2017
|
|
2017 vs. 2016
|
|
Increase
|
|
Change
Attributable to
|
|
Increase
|
|
Change
Attributable to
|
Interest income
|
(Decrease)
|
|
Rate
|
|
Volume
|
|
(Decrease)
|
|
Rate
|
|
Volume
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,750
|
|
|
$
|
360
|
|
|
$
|
1,390
|
|
|
$
|
973
|
|
|
$
|
(223
|
)
|
|
$
|
1,196
|
|
Real estate
|
2,875
|
|
|
1,396
|
|
|
1,479
|
|
|
6,637
|
|
|
(1,119
|
)
|
|
7,756
|
|
Consumer
|
(47
|
)
|
|
(49
|
)
|
|
2
|
|
|
(253
|
)
|
|
(192
|
)
|
|
(61
|
)
|
Total loans
|
4,578
|
|
|
1,707
|
|
|
2,871
|
|
|
7,357
|
|
|
(1,534
|
)
|
|
8,891
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
859
|
|
|
353
|
|
|
506
|
|
|
175
|
|
|
146
|
|
|
29
|
|
Mortgage-backed and CMOs
|
742
|
|
|
139
|
|
|
603
|
|
|
90
|
|
|
42
|
|
|
48
|
|
State and municipal
|
(1,382
|
)
|
|
(714
|
)
|
|
(668
|
)
|
|
(1,866
|
)
|
|
76
|
|
|
(1,942
|
)
|
Other securities
|
11
|
|
|
50
|
|
|
(39
|
)
|
|
147
|
|
|
153
|
|
|
(6
|
)
|
Total securities
|
230
|
|
|
(172
|
)
|
|
402
|
|
|
(1,454
|
)
|
|
417
|
|
|
(1,871
|
)
|
Deposits in other banks
|
139
|
|
|
407
|
|
|
(268
|
)
|
|
458
|
|
|
403
|
|
|
55
|
|
Total interest income
|
4,947
|
|
|
1,942
|
|
|
3,005
|
|
|
6,361
|
|
|
(714
|
)
|
|
7,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
6
|
|
|
3
|
|
|
3
|
|
|
(56
|
)
|
|
(57
|
)
|
|
1
|
|
Money market
|
1,837
|
|
|
1,506
|
|
|
331
|
|
|
1,236
|
|
|
1,007
|
|
|
229
|
|
Savings
|
2
|
|
|
—
|
|
|
2
|
|
|
(9
|
)
|
|
(12
|
)
|
|
3
|
|
Time
|
447
|
|
|
547
|
|
|
(100
|
)
|
|
(480
|
)
|
|
(331
|
)
|
|
(149
|
)
|
Total deposits
|
2,292
|
|
|
2,056
|
|
|
236
|
|
|
691
|
|
|
607
|
|
|
84
|
|
Customer repurchase agreements
|
22
|
|
|
147
|
|
|
(125
|
)
|
|
137
|
|
|
137
|
|
|
—
|
|
Other borrowings
|
69
|
|
|
506
|
|
|
(437
|
)
|
|
147
|
|
|
90
|
|
|
57
|
|
Total interest expense
|
2,383
|
|
|
2,709
|
|
|
(326
|
)
|
|
975
|
|
|
834
|
|
|
141
|
|
Net interest income
|
$
|
2,564
|
|
|
$
|
(767
|
)
|
|
$
|
3,331
|
|
|
$
|
5,386
|
|
|
$
|
(1,548
|
)
|
|
$
|
6,934
|
|
Noninterest Income
For the year ended
December 31, 2018
, noninterest income decreased $953,000 or 6.7% compared to the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Noninterest income:
|
|
|
|
|
|
|
|
Trust fees
|
$
|
3,783
|
|
|
$
|
3,926
|
|
|
$
|
(143
|
)
|
|
(3.6
|
)%
|
Service charges on deposit accounts
|
2,455
|
|
|
2,426
|
|
|
29
|
|
|
1.2
|
|
Other fees and commissions
|
2,637
|
|
|
2,471
|
|
|
166
|
|
|
6.7
|
|
Mortgage banking income
|
1,862
|
|
|
2,208
|
|
|
(346
|
)
|
|
(15.7
|
)
|
Securities gains, net
|
123
|
|
|
812
|
|
|
(689
|
)
|
|
(84.9
|
)
|
Brokerage fees
|
795
|
|
|
829
|
|
|
(34
|
)
|
|
(4.1
|
)
|
Income from Small Business Investment Companies
|
637
|
|
|
236
|
|
|
401
|
|
|
169.9
|
|
Gains on premises and equipment, net
|
60
|
|
|
344
|
|
|
(284
|
)
|
|
82.6
|
|
Other
|
922
|
|
|
975
|
|
|
(53
|
)
|
|
(5.4
|
)
|
Total noninterest income
|
$
|
13,274
|
|
|
$
|
14,227
|
|
|
$
|
(953
|
)
|
|
(6.7
|
)%
|
A substantial portion of trust fees are earned based on account fair values, so changes in the equity markets may have a large and potentially volatile impact on revenue. Trust fees decreased slightly while service charges increased slightly for
2018
compared to
2017
. Other fees and commissions were positively impacted by higher levels of debit card transaction volume. Mortgage banking income decreased in
2018
, primarily due to lower demand. Secondary market mortgage loan volume for
2018
was $77,739,000 compared to $86,612,000 for
2017
. Net securities gains were down $689,000, or 84.9%. Income from Small Business Investment Company ("SBIC") investments, which is volatile and difficult to predict, increased $401,000 or 169.9% for
2018
compared to
2017
. Net gains on premises and equipment decreased $284,000 for
2018
compared to
2017
primarily due to a $337,000 gain from the 2017 sale of a bank owned commercial lot acquired in the MidCarolina acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Noninterest income:
|
|
|
|
|
|
|
|
Trust fees
|
$
|
3,926
|
|
|
$
|
3,791
|
|
|
$
|
135
|
|
|
3.6
|
%
|
Service charges on deposit accounts
|
2,426
|
|
|
2,467
|
|
|
(41
|
)
|
|
(1.7
|
)
|
Other fees and commissions
|
2,471
|
|
|
2,261
|
|
|
210
|
|
|
9.3
|
|
Mortgage banking income
|
2,208
|
|
|
1,713
|
|
|
495
|
|
|
28.9
|
|
Securities gains, net
|
812
|
|
|
836
|
|
|
(24
|
)
|
|
(2.9
|
)
|
Brokerage fees
|
829
|
|
|
843
|
|
|
(14
|
)
|
|
(1.7
|
)
|
Income from Small Business Investment Companies
|
236
|
|
|
463
|
|
|
(227
|
)
|
|
(49.0
|
)
|
Gains (losses) on premises and equipment, net
|
344
|
|
|
(9
|
)
|
|
353
|
|
|
3,922.2
|
|
Other
|
975
|
|
|
1,140
|
|
|
(165
|
)
|
|
(14.5
|
)
|
Total noninterest income
|
$
|
14,227
|
|
|
$
|
13,505
|
|
|
$
|
722
|
|
|
5.3
|
%
|
Trust fees increased slightly while service charges decreased slightly for
2017
compared to
2016
. Other fees and commissions were positively impacted by higher levels of debit card transaction volume. Mortgage banking income increased significantly in
2017
compared to
2016
as a result of increases in the volume of originations. Also, the Bank added new mortgage originators in the Roanoke market in the fourth quarter of 2016 and the second quarter of 2017. Secondary market mortgage loan volume for
2017
was $86,612,000 compared to $78,330,000 for
2016
. Income from SBIC investments decreased $227,000, or 49.0%, for
2017
compared to
2016
. Net gains (losses) on premises and equipment increased $353,000 for 2017 compared to 2016 primarily due to a $337,000 gain from the sale of a bank owned commercial lot acquired in the MidCarolina acquisition. Other income decreased $165,000 for
2017
compared to
2016
primarily due to the additional income from investments in limited partnerships in 2016.
Noninterest Expense
For the year ended
December 31, 2018
, noninterest expense increased $1,363,000, or 3.2%, as compared to the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Noninterest expense:
|
|
|
|
|
|
|
|
Salaries
|
$
|
20,509
|
|
|
$
|
19,829
|
|
|
$
|
680
|
|
|
3.4
|
%
|
Employee benefits
|
4,370
|
|
|
4,274
|
|
|
96
|
|
|
2.2
|
|
Occupancy and equipment
|
4,378
|
|
|
4,487
|
|
|
(109
|
)
|
|
(2.4
|
)
|
FDIC assessment
|
537
|
|
|
538
|
|
|
(1
|
)
|
|
(0.2
|
)
|
Bank franchise tax
|
1,054
|
|
|
1,072
|
|
|
(18
|
)
|
|
(1.7
|
)
|
Core deposit intangible amortization
|
265
|
|
|
528
|
|
|
(263
|
)
|
|
(49.8
|
)
|
Data processing
|
1,691
|
|
|
2,014
|
|
|
(323
|
)
|
|
(16.0
|
)
|
Software
|
1,279
|
|
|
1,144
|
|
|
135
|
|
|
11.8
|
|
Other real estate owned, net
|
122
|
|
|
303
|
|
|
(181
|
)
|
|
(59.7
|
)
|
Merger related expenses
|
872
|
|
|
—
|
|
|
872
|
|
|
—
|
|
Other
|
9,169
|
|
|
8,694
|
|
|
475
|
|
|
5.5
|
|
Total noninterest expense
|
$
|
44,246
|
|
|
$
|
42,883
|
|
|
$
|
1,363
|
|
|
3.2
|
%
|
Salaries expense increased $680,000, or 3.4%, in
2018
compared to
2017
as a result of normal annual salary adjustments, additional employees, anticipated retirements and adjustments to fringe benefit accruals. Core deposit intangible amortization decreased in
2018
compared to
2017
as the amortization expense relating to the Company's acquisition of MidCarolina in July 2011 is recognized under the accelerated method and will be fully amortized in 2020. The primary driver of the increase in noninterest expense was merger related expenses pursuant to the pending acquisition of HomeTown; these nonrecurring expenses totaled $872,000 in the fourth quarter of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Noninterest expense:
|
|
|
|
|
|
|
|
Salaries
|
$
|
19,829
|
|
|
$
|
17,568
|
|
|
$
|
2,261
|
|
|
12.9
|
%
|
Employee benefits
|
4,274
|
|
|
3,829
|
|
|
445
|
|
|
11.6
|
|
Occupancy and equipment
|
4,487
|
|
|
4,246
|
|
|
241
|
|
|
5.7
|
|
FDIC assessment
|
538
|
|
|
647
|
|
|
(109
|
)
|
|
(16.8
|
)
|
Bank franchise tax
|
1,072
|
|
|
995
|
|
|
77
|
|
|
7.7
|
|
Core deposit intangible amortization
|
528
|
|
|
964
|
|
|
(436
|
)
|
|
(45.2
|
)
|
Data processing
|
2,014
|
|
|
1,828
|
|
|
186
|
|
|
10.2
|
|
Software
|
1,144
|
|
|
1,143
|
|
|
1
|
|
|
0.1
|
|
Other real estate owned, net
|
303
|
|
|
336
|
|
|
(33
|
)
|
|
(9.8
|
)
|
Other
|
8,694
|
|
|
8,245
|
|
|
449
|
|
|
5.4
|
|
Total noninterest expense
|
$
|
42,883
|
|
|
$
|
39,801
|
|
|
$
|
3,082
|
|
|
7.7
|
%
|
Salaries expense increased $2,261,000, or 12.9%, in
2017
compared to
2016
. The increase in salaries expense and employee benefits expense resulted primarily due to the addition of eight full time equivalent employees during 2017. The Bank added two mortgage loan originators, a trust officer, and several branch level personnel. On the support side of the Bank, additions were made to the credit function, risk, and loan review. The expense for FDIC assessment decreased in
2017
due to the reduction in FDIC assessment rates effective the third quarter of 2016. Core deposit intangible amortization decreased in 2017 compared to 2016 as the amortization expense relating to the Company's acquisition of MidCarolina in July 2011 is recognized under the accelerated method and will be fully amortized in 2020. The increase of $449,000 in other expenses for
2017 compared to 2016 is primarily due to increased marketing and printing for marketing campaigns and the de novo branch openings in 2017.
Income Taxes
Income taxes on
2018
earnings amounted to $5,646,000, resulting in an effective tax rate of 20.0%, compared to 41.5% in
2017
and 30.1% in
2016
. Income tax expense for 2017 includes a one-time write-down of net deferred tax assets in the amount of $2.7 million, recorded as a result of the enactment of the Tax Reform Act on December 22, 2017. The Tax Reform Act reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018.
The effective tax rate is lowered by income that is not taxable for federal income tax purposes. The primary non-taxable income is from state and municipal securities and loans.
Fair Value Impact to Pretax Income
The July 2011 merger with MidCarolina and the January 2015 merger with MainStreet had a material and positive impact on earnings. The ongoing financial impact of the mergers was mostly the result of the increase in earnings assets. However, the specific financial impact of the fair value related accounting adjustments is reflected in the following tables. The tables present the actual effect of the accretable and amortizable fair value adjustments attributable to the mergers on net interest income and pretax income for the years ended
December 31, 2018
,
2017
, and
2016
, respectively (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Effect
|
|
Accretion (Amortization) for the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Interest income/(expense):
|
|
|
|
|
|
|
|
Acquired performing loans
|
Income
|
|
$
|
438
|
|
|
$
|
695
|
|
|
$
|
1,085
|
|
Purchased credit impaired loans
|
Income
|
|
952
|
|
|
1,541
|
|
|
1,357
|
|
FHLB advances
|
Expense
|
|
—
|
|
|
(20
|
)
|
|
(22
|
)
|
Junior subordinated debt
|
Expense
|
|
(102
|
)
|
|
(102
|
)
|
|
(102
|
)
|
Net Interest Income
|
|
|
1,288
|
|
|
2,114
|
|
|
2,318
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
Amortization of core deposit intangible
|
Expense
|
|
(265
|
)
|
|
(528
|
)
|
|
(964
|
)
|
Net non-interest expense
|
|
|
(265
|
)
|
|
(528
|
)
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
Change in pretax income
|
|
|
$
|
1,023
|
|
|
$
|
1,586
|
|
|
$
|
1,354
|
|
Impact of Inflation and Changing Prices
The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The most significant effect of inflation is on noninterest expenses that tend to rise during periods of inflation. Changes in interest rates have a greater impact on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management practices, the Company has the ability to react to those changes and measure and monitor its interest rate and liquidity risk.
Market Risk Management
Effectively managing market risk is essential to achieving the Company's financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company's primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk. Both are discussed in the following sections.
Interest Rate Risk Management
Interest rate risk and its impact on net interest income is a primary market risk exposure. The Company manages its exposure to fluctuations in interest rates through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors, both of which receive and review periodic reports of the Company's interest rate risk position.
The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company's simulation analysis, management believes the Company's interest sensitivity position at
December 31, 2018
is asset sensitive. As of early 2019, management expects that the general direction of market interest rates will be stable to up, though volatility, sometimes substantial, is anticipated in the short-term.
Earnings Simulation
The table below shows the estimated impact of changes in interest rates on net interest income as of
December 31, 2018
(dollars in thousands), assuming gradual and parallel changes in interest rates, and consistent levels of assets and liabilities. Net interest income for the following twelve months is projected to increase when interest rates are higher than current rates.
Estimated Changes in Net Interest Income
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Change in net interest income
|
Change in interest rates
|
Amount
|
|
Percent
|
|
|
|
|
Up 4.0%
|
$
|
9,311
|
|
|
12.3
|
%
|
Up 3.0%
|
7,025
|
|
|
9.2
|
|
Up 2.0%
|
4,769
|
|
|
6.3
|
|
Up 1.0%
|
2,495
|
|
|
3.3
|
|
Flat
|
—
|
|
|
—
|
|
Down 0.25%
|
(630
|
)
|
|
(0.8
|
)
|
Down 0.50%
|
(3,731
|
)
|
|
(4.9
|
)
|
Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.
The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the period ended
December 31, 2018
(dollars in thousands):
Estimated Changes in Economic Value of Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Change in interest rates
|
Amount
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
Up 4%
|
$
|
390,048
|
|
|
$
|
75,631
|
|
|
24.1
|
%
|
Up 3%
|
378,366
|
|
|
63,949
|
|
|
20.3
|
|
Up 2%
|
362,945
|
|
|
48,528
|
|
|
15.4
|
|
Up 1%
|
342,399
|
|
|
27,982
|
|
|
8.9
|
|
Flat
|
314,417
|
|
|
—
|
|
|
—
|
|
Down 0.25%
|
305,494
|
|
|
(8,923
|
)
|
|
(2.8
|
)
|
Down 0.50%
|
273,177
|
|
|
(41,240
|
)
|
|
(13.1
|
)
|
Liquidity Risk Management
Liquidity is the ability of the Company in a timely manner to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company's ability to meet the daily cash flow requirements of its customers, whether they are borrowers requiring funds or depositors desiring to withdraw funds. Additionally, the Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The Company manages its exposure to fluctuations in interest rates and liquidity needs through policies approved by the ALCO and Board of Directors, both of which receive periodic reports of the Company's interest rate risk and liquidity position. The Company uses a computer simulation model to assist in the management of the future liquidity needs of the Company.
Liquidity sources include on balance sheet and off balance sheet sources.
Balance sheet liquidity sources include cash, amounts due from banks, loan repayments, bond maturities and calls, and increases in deposits. Further, the Company maintains a large, high quality, very liquid bond portfolio, which is generally 50% to 60% unpledged and would, accordingly, be available for sale if necessary.
Off balance sheet sources include lines of credit from the Federal Home Loan Bank of Atlanta ("FHLB"), federal funds lines of credit, and access to the Federal Reserve Bank of Richmond's discount window.
The Company has a line of credit with the FHLB, equal to 30% of the Company's assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, home equity lines of credit, commercial real estate loans and commercial construction loans. In addition, the Company pledges as collateral its capital stock in and deposits with the FHLB. At
December 31, 2018
, there were no principal advance obligations to the FHLB compared to $24,000,000 in variable-rate, short-term advances at
December 31, 2017
. The Company also had outstanding $190,250,000 in letters of credit at
December 31, 2018
compared to $190,700,000 in letters of credit at
December 31, 2017
. The letters of credit provide the Bank with additional collateral for securing public entity deposits above FDIC insurance levels, thereby providing less need for collateral pledging from the securities portfolio and accordingly increasing the Company's balance sheet liquidity.
Short-term borrowing is discussed in Note 9 and long-term borrowing is discussed in Note 10 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The Company has federal funds lines of credit established with two correspondent banks in the amounts of $15,000,000 each and has access to the Federal Reserve Bank of Richmond's discount window. There were no amounts outstanding under these facilities at
December 31, 2018
. The Company, through its subsidiary bank, has a relationship with Promontory Network, the sponsoring entity for the Certificate of Deposit Account Registry Service
®
("CDARS"). Through CDARS, the Company is able to provide deposit customers with access to aggregate FDIC insurance in amounts far exceeding $250,000. This gives the Company the ability, as and when needed, to attract and retain large deposits from insurance sensitive customers. Under the EGRRCPA signed into law on May 24, 2018, a well-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits. With CDARS, the Company has the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Company can use CDARS to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. Thus, CDARS serves as a
deposit-gathering tool and an additional liquidity management tool. Deposits through the CDARS program as of
December 31, 2018
and
2017
were $22,431,000 and $25,838,000, respectively.
The Bank also participates with the Promontory Network using Insured Cash Sweep
®
, a product which provides the Bank the capability of providing additional deposit insurance to customers in the context of a money market account arrangement. The product is analogous to the CDARS product discussed above.
Management believes that these sources provide sufficient and timely liquidity, both on and off balance sheet.
BALANCE SHEET ANALYSIS
Securities
The securities portfolio generates income, plays a strategic role in the management of interest rate sensitivity, provides a source of liquidity, and is used to meet collateral requirements. The securities portfolio consists of high quality investments, mostly federal agency, mortgage-backed, and state and municipal securities.
The Company is cognizant of the continuing historically low and recently volatile interest rate environment and has elected to maintain a defensive asset liability strategy of purchasing high quality taxable securities of relatively short duration and somewhat longer term tax exempt securities, whose market values are not as volatile in rising rate environments as similar termed taxable investments.
The following table presents information on the amortized cost, maturities, and taxable equivalent yields of available for sale securities at the end of the last three years (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Amortized
Cost
|
|
Taxable
Equivalent
Yield
|
|
Amortized
Cost
|
|
Taxable
Equivalent
Yield
|
|
Amortized
Cost
|
|
Taxable
Equivalent
Yield
|
Federal Agencies:
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
$
|
—
|
|
|
—
|
%
|
|
$
|
7,001
|
|
|
1.49
|
%
|
|
$
|
9,392
|
|
|
1.16
|
%
|
1 to 5 years
|
68,786
|
|
|
2.27
|
|
|
48,789
|
|
|
1.91
|
|
|
27,039
|
|
|
1.39
|
|
5 to 10 years
|
55,797
|
|
|
2.66
|
|
|
45,973
|
|
|
2.23
|
|
|
57,467
|
|
|
1.97
|
|
Over 10 years
|
12,487
|
|
|
2.05
|
|
|
12,483
|
|
|
2.02
|
|
|
12,481
|
|
|
2.02
|
|
Total
|
137,070
|
|
|
2.40
|
|
|
114,246
|
|
|
2.02
|
|
|
106,379
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
72
|
|
|
3.14
|
|
|
—
|
|
|
—
|
|
|
1,919
|
|
|
4.57
|
|
1 to 5 years
|
2,946
|
|
|
2.62
|
|
|
2,770
|
|
|
2.59
|
|
|
4,040
|
|
|
2.67
|
|
5 to 10 years
|
36,241
|
|
|
2.44
|
|
|
22,849
|
|
|
2.29
|
|
|
15,242
|
|
|
2.29
|
|
Over 10 years
|
74,624
|
|
|
2.54
|
|
|
80,544
|
|
|
2.28
|
|
|
58,716
|
|
|
1.99
|
|
Total
|
113,883
|
|
|
2.51
|
|
|
106,163
|
|
|
2.29
|
|
|
79,917
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and Municipal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
6,872
|
|
|
2.25
|
|
|
4,539
|
|
|
2.73
|
|
|
11,637
|
|
|
2.80
|
|
1 to 5 years
|
46,287
|
|
|
2.93
|
|
|
52,975
|
|
|
3.52
|
|
|
73,558
|
|
|
3.26
|
|
5 to 10 years
|
20,199
|
|
|
2.82
|
|
|
27,411
|
|
|
3.77
|
|
|
47,977
|
|
|
3.76
|
|
Over 10 years
|
6,664
|
|
|
2.71
|
|
|
7,786
|
|
|
3.03
|
|
|
12,585
|
|
|
3.36
|
|
Total
|
80,022
|
|
|
2.82
|
|
|
92,711
|
|
|
3.52
|
|
|
145,757
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,313
|
|
|
1.72
|
|
1 to 5 years
|
500
|
|
|
2.42
|
|
|
1,042
|
|
|
1.50
|
|
|
4,279
|
|
|
1.85
|
|
5 to 10 years
|
—
|
|
|
—
|
|
|
500
|
|
|
2.42
|
|
|
500
|
|
|
2.42
|
|
Over 10 years
|
6,299
|
|
|
5.41
|
|
|
6,300
|
|
|
5.41
|
|
|
6,300
|
|
|
5.41
|
|
Total
|
6,799
|
|
|
4.70
|
|
|
7,842
|
|
|
4.70
|
|
|
13,392
|
|
|
3.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No maturity
|
—
|
|
|
—
|
|
|
1,383
|
|
|
—
|
|
|
1,288
|
|
|
—
|
|
Total
|
—
|
|
|
—
|
|
|
1,383
|
|
|
—
|
|
|
1,288
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
$
|
337,774
|
|
|
2.59
|
%
|
|
$
|
322,345
|
|
|
2.60
|
%
|
|
$
|
346,733
|
|
|
2.60
|
%
|
The Company adopted ASU 2016-01 effective January 1, 2018 and had equity securities with a fair value of $1,830,000 at
December 31, 2018
and recognized in income $42,000 of unrealized holding gains during
2018
. During the year ended
December 31, 2018
, the Company sold $431,000 in equity securities at fair value.
Loans
The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans to small and medium-sized businesses, construction and land development loans, and home equity loans.
Average loans increased $67,418,000 or 5.3% from
2017
to
2018
. Average loans increased $202,172,000 or 19.0% from
2016
to
2017
.
At
December 31, 2018
, total loans were $1,357,476,000, an increase of $21,351,000 or 1.6% from the prior year. Growth was muted in most of 2018 primarily because of over $40 million in large commercial loan payoffs during the year.
Loans held for sale totaled $640,000 at
December 31, 2018
and $1,639,000 at
December 31, 2017
. Loan production volume was $77,739,000 and $86,612,000 for
2018
and
2017
, respectively. These loans were approximately 60% purchase, 40% refinancing.
Management of the loan portfolio is organized around portfolio segments. Each segment is comprised of various loan types that are reflective of operational and regulatory reporting requirements. The following table presents the Company's portfolio as of the dates indicated by segment (dollars in thousands):
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
$
|
97,240
|
|
|
$
|
123,147
|
|
|
$
|
114,258
|
|
|
$
|
72,968
|
|
|
$
|
50,863
|
|
Commercial real estate
|
655,800
|
|
|
637,701
|
|
|
510,960
|
|
|
430,186
|
|
|
391,472
|
|
Residential real estate
|
209,438
|
|
|
209,326
|
|
|
215,104
|
|
|
220,434
|
|
|
175,293
|
|
Home equity
|
103,933
|
|
|
109,857
|
|
|
110,751
|
|
|
98,449
|
|
|
91,075
|
|
Total real estate
|
1,066,411
|
|
|
1,080,031
|
|
|
951,073
|
|
|
822,037
|
|
|
708,703
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
285,972
|
|
|
251,666
|
|
|
208,717
|
|
|
177,481
|
|
|
126,981
|
|
Consumer
|
5,093
|
|
|
4,428
|
|
|
5,031
|
|
|
6,007
|
|
|
5,241
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
$
|
1,357,476
|
|
|
$
|
1,336,125
|
|
|
$
|
1,164,821
|
|
|
$
|
1,005,525
|
|
|
$
|
840,925
|
|
The following table provides loan balance information by geographic regions. In some circumstances, loans may be originated in one region for borrowers located in other regions (dollars in thousands):
Loans by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Percentage Change
in Balance Since
December 31, 2017
|
Balance
|
|
Percentage
of Portfolio
|
|
Danville region
|
$
|
219,326
|
|
|
16.2
|
%
|
|
(4.8
|
)%
|
Central region
|
150,299
|
|
|
11.1
|
|
|
(4.4
|
)
|
Southside region
|
70,743
|
|
|
5.2
|
|
|
(3.4
|
)
|
Eastern region
|
93,314
|
|
|
6.9
|
|
|
(4.8
|
)
|
Franklin region
|
110,688
|
|
|
8.1
|
|
|
2.6
|
|
Roanoke region
|
116,219
|
|
|
8.6
|
|
|
24.1
|
|
Alamance region
|
263,008
|
|
|
19.4
|
|
|
8.5
|
|
Guilford region
|
266,615
|
|
|
19.6
|
|
|
(6.7
|
)
|
Winston-Salem region
|
67,264
|
|
|
4.9
|
|
|
41.4
|
|
|
|
|
|
|
|
Total loans
|
$
|
1,357,476
|
|
|
100.0
|
%
|
|
1.6
|
%
|
The Danville region consists of offices in Danville, Virginia and Yanceyville, North Carolina. The Central region consists of offices in Bedford, Lynchburg, and the counties of Bedford and Campbell, Virginia. The Southside region consists of offices in Martinsville and Henry County, Virginia. The Eastern region consists of offices in South Boston and the counties of Halifax and Pittsylvania, Virginia. The Franklin region consists of offices in Rocky Mount, Union Hall, and Hardy, Virginia. The Roanoke region consists of an office in Roanoke County, Virginia. The Alamance region consists of offices in Burlington, Graham, and Mebane, North Carolina. The Guilford region consists of offices in Greensboro, North Carolina. The Winston-Salem region consists of an office in Winston-Salem, North Carolina.
The Company does not participate in or have any highly leveraged lending transactions, as defined by bank regulations. The Company has no foreign loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded 10% of total loans at
December 31, 2018
or
2017
.
The following table presents the maturity schedule of selected loan types (dollars in thousands):
Maturities of Selected Loan Types
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and
Industrial (1)
|
|
Construction
and Land
Development
|
|
Total
|
1 year or less
|
$
|
54,614
|
|
|
$
|
20,045
|
|
|
$
|
74,659
|
|
1 to 5 years (2)
|
155,570
|
|
|
56,359
|
|
|
211,929
|
|
After 5 years (2)
|
75,788
|
|
|
20,836
|
|
|
96,624
|
|
Total
|
$
|
285,972
|
|
|
$
|
97,240
|
|
|
$
|
383,212
|
|
______________________
|
|
(1)
|
Includes agricultural loans.
|
|
|
(2)
|
Of the loans due after one year, $228,551 have predetermined interest rates and $80,002 have floating or adjustable interest rates.
|
Provision for Loan Losses
The Company had a negative provision for loan losses of $103,000 for the year ended December 31,
2018
, compared to a provision for loan losses of $1,016,000 and $250,000 for the years ended December 31,
2017
and
2016
, respectively.
The negative provision for
2018
related to favorable adjustments on the purchased credit impaired loan loss allowance. The larger provision for
2017
related to continued loan growth but was mitigated by continued strong asset quality metrics and improving local and national economic indicators. The smaller provision expense in
2016
related to improvement in various qualitative factors, notably asset quality, local economic conditions and continued decline in historical loss factors compared to 2015. Improvements in asset quality were apparent in declines in past due and nonaccrual loans, as well as in qualitative factors for asset quality and economic conditions, which were somewhat offset by additional factors assigned to unseasoned loans in new markets.
Allowance for Loan Losses
The purpose of the ALLL is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The ALLL was $12,805,000, $13,603,000, and $12,801,000 at
December 31, 2018
,
2017
, and
2016
, respectively. The ALLL as a percentage of loans at each of those dates was 0.94%, 1.02%, and 1.10%, respectively.
The decrease in the allowance as a percentage of loans during
2018
,
2017
, and
2016
was primarily due to continued high asset quality, low charge-offs, and improvement in various qualitative factors, notably economic, used in the determination of the allowance.
In an effort to better evaluate the adequacy of its ALLL, the Company computes its ASC 450,
Contingencies
, loan balance by reducing total loans by acquired loans and loans that were evaluated for impairment individually or smaller balance nonaccrual loans evaluated for impairment in homogeneous pools. It also adjusts its ASC 450 loan loss reserve balance total by removing allowances associated with these other pools of loans.
The general allowance, ASC 450 (FAS 5) reserves to ASC 450 loans, was 0.94% at
December 31, 2018
, compared to 1.04% at
December 31, 2017
. On a dollar basis, the reserve was $12,560,000 at
December 31, 2018
, compared to $13,151,000 at
December 31, 2017
. The percentage of the reserve to total loans has declined due to improving local and national economic conditions and continued improvement in asset quality metrics. This segment of the allowance represents by far the largest portion of the loan portfolio and the largest aggregate risk.
The specific allowance, ASC 310-40 (FAS 114) reserves to ASC 310-40 loans, was 4.78% at
December 31, 2018
, compared to 5.18% at
December 31, 2017
. On a dollar basis, the reserve was $64,000 at
December 31, 2018
, compared to $167,000 at
December 31, 2017
. There is ongoing turnover in the composition of the impaired loan population, which decreased $1,883,000 from
December 31, 2017
.
The specific allowance does not include reserves related to acquired loans with deteriorated credit quality. This reserve was $181,000 at
December 31, 2018
, compared to $285,000 at
December 31, 2017
. This is the only portion of the reserve related to
acquired loans. Cash flow expectations for these loans are reviewed on a quarterly basis and unfavorable changes in those estimates relative to the initial estimates can result in the need for specific loan loss provisions.
The following table presents the Company's loan loss and recovery experience for the past five years (dollars in thousands):
Summary of Loan Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
|
$
|
13,603
|
|
|
$
|
12,801
|
|
|
$
|
12,601
|
|
|
$
|
12,427
|
|
|
$
|
12,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
—
|
|
|
35
|
|
|
—
|
|
|
20
|
|
|
—
|
|
Commercial real estate
|
|
11
|
|
|
58
|
|
|
10
|
|
|
462
|
|
|
510
|
|
Residential real estate
|
|
—
|
|
|
159
|
|
|
21
|
|
|
15
|
|
|
121
|
|
Home equity
|
|
86
|
|
|
13
|
|
|
66
|
|
|
308
|
|
|
137
|
|
Total real estate
|
|
97
|
|
|
265
|
|
|
97
|
|
|
805
|
|
|
768
|
|
Commercial and industrial
|
|
787
|
|
|
282
|
|
|
40
|
|
|
175
|
|
|
101
|
|
Consumer
|
|
136
|
|
|
143
|
|
|
189
|
|
|
220
|
|
|
95
|
|
Total charge-offs
|
|
1,020
|
|
|
690
|
|
|
326
|
|
|
1,200
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
4
|
|
|
43
|
|
|
11
|
|
|
81
|
|
|
28
|
|
Commercial real estate
|
|
6
|
|
|
17
|
|
|
21
|
|
|
43
|
|
|
38
|
|
Residential real estate
|
|
45
|
|
|
45
|
|
|
53
|
|
|
121
|
|
|
126
|
|
Home equity
|
|
104
|
|
|
40
|
|
|
15
|
|
|
18
|
|
|
65
|
|
Total real estate
|
|
159
|
|
|
145
|
|
|
100
|
|
|
263
|
|
|
257
|
|
Commercial and industrial
|
|
69
|
|
|
223
|
|
|
40
|
|
|
32
|
|
|
51
|
|
Consumer
|
|
97
|
|
|
108
|
|
|
136
|
|
|
129
|
|
|
83
|
|
Total recoveries
|
|
325
|
|
|
476
|
|
|
276
|
|
|
424
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
695
|
|
|
214
|
|
|
50
|
|
|
776
|
|
|
573
|
|
Provision for (recovery of) loan losses
|
|
(103
|
)
|
|
1,016
|
|
|
250
|
|
|
950
|
|
|
400
|
|
Balance at end of period
|
|
$
|
12,805
|
|
|
$
|
13,603
|
|
|
$
|
12,801
|
|
|
$
|
12,601
|
|
|
$
|
12,427
|
|
The following table summarizes the allocation of the allowance for loan losses by major portfolio segments for the past five years (dollars in thousands):
Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
2,537
|
|
|
21.0
|
%
|
|
$
|
2,413
|
|
|
18.8
|
%
|
|
$
|
2,095
|
|
|
17.9
|
%
|
|
$
|
2,065
|
|
|
17.7
|
%
|
|
$
|
1,818
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
7,246
|
|
|
55.5
|
|
|
8,321
|
|
|
57.0
|
|
|
7,355
|
|
|
53.7
|
|
|
6,930
|
|
|
50.0
|
|
|
6,814
|
|
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
2,977
|
|
|
23.1
|
|
|
2,825
|
|
|
23.9
|
|
|
3,303
|
|
|
28.0
|
|
|
3,546
|
|
|
31.7
|
|
|
3,715
|
|
|
31.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
45
|
|
|
0.4
|
|
|
44
|
|
|
0.3
|
|
|
48
|
|
|
0.4
|
|
|
60
|
|
|
0.6
|
|
|
80
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
12,805
|
|
|
100.0
|
%
|
|
$
|
13,603
|
|
|
100.0
|
%
|
|
$
|
12,801
|
|
|
100.0
|
%
|
|
$
|
12,601
|
|
|
100.0
|
%
|
|
$
|
12,427
|
|
|
100.0
|
%
|
% - represents the percentage of loans in each category to total loans.
Asset Quality Indicators
The following table provides certain qualitative indicators relevant to the Company's loan portfolio for the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios
|
|
As of or for the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Allowance to loans*
|
0.94
|
%
|
|
1.02
|
%
|
|
1.10
|
%
|
|
1.25
|
%
|
|
1.48
|
%
|
ASC 450/general allowance
|
0.94
|
|
|
1.04
|
|
|
1.17
|
|
|
1.40
|
|
|
1.55
|
|
Net charge-offs to year-end allowance
|
5.43
|
|
|
1.57
|
|
|
0.39
|
|
|
6.16
|
|
|
4.61
|
|
Net charge-offs to average loans
|
0.05
|
|
|
0.02
|
|
|
0.00
|
|
|
0.08
|
|
|
0.07
|
|
Nonperforming assets to total assets*
|
0.11
|
|
|
0.21
|
|
|
0.29
|
|
|
0.48
|
|
|
0.46
|
|
Nonperforming loans to loans*
|
0.09
|
|
|
0.19
|
|
|
0.30
|
|
|
0.52
|
|
|
0.49
|
|
Provision to net charge-offs (recoveries)
|
(14.82
|
)
|
|
474.77
|
|
|
500.00
|
|
|
122.42
|
|
|
69.81
|
|
Provision to average loans
|
(0.01
|
)
|
|
0.08
|
|
|
0.02
|
|
|
0.10
|
|
|
0.05
|
|
Allowance to nonperforming loans*
|
1,101.98
|
|
|
531.37
|
|
|
360.39
|
|
|
242.09
|
|
|
302.21
|
|
* at year end.
Nonperforming Assets (Loans and Other Real Estate Owned)
Nonperforming loans include loans on which interest is no longer accrued and accruing loans that are contractually past due 90 days or more. Nonperforming loans include loans originated and loans acquired.
Nonperforming loans to total loans were 0.09% at
December 31, 2018
compared to 0.19% at
December 31, 2017
. The decrease in nonperforming loans during
2018
was $1,398,000.
Nonperforming assets include nonperforming loans and foreclosed real estate. Nonperforming assets represented 0.11% at
December 31, 2018
compared to 0.21% of total assets at
December 31, 2017
.
In most cases, it is the policy of the Company that any loan that becomes 90 days past due will automatically be placed on nonaccrual loan status, accrued interest reversed out of income, and further interest accrual ceased. Any payments received on such loans will be credited to principal. In some cases a loan in process of renewal may become 90 days past due. In these instances the loan may still be accruing because of a delayed renewal process in which the customer has not been billed. In accounting for acquired impaired loans, such loans are not classified as nonaccrual when they become 90 days past due. They are considered to be accruing because their interest income relates to the accretable yield and not to contractual interest payments.
Loans will only be restored to full accrual status after six consecutive months of payments that were each less than 30 days delinquent. The Company strictly adheres with this policy before restoring a loan to normal accrual status.
The following table presents the Company's nonperforming asset history, including acquired impaired loans as of the dates indicated (dollars in thousands):
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
Real estate
|
$
|
1,007
|
|
|
$
|
2,111
|
|
|
$
|
2,928
|
|
|
$
|
5,022
|
|
|
$
|
4,111
|
|
Commercial
|
83
|
|
|
90
|
|
|
19
|
|
|
90
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
18
|
|
|
2
|
|
|
1
|
|
Total nonaccrual loans
|
1,090
|
|
|
2,201
|
|
|
2,965
|
|
|
5,114
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days and accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
72
|
|
|
359
|
|
|
587
|
|
|
84
|
|
|
—
|
|
Commercial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Total past due loans
|
72
|
|
|
359
|
|
|
587
|
|
|
91
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
1,162
|
|
|
2,560
|
|
|
3,552
|
|
|
5,205
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned, net
|
869
|
|
|
1,225
|
|
|
1,328
|
|
|
2,184
|
|
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
$
|
2,031
|
|
|
$
|
3,785
|
|
|
$
|
4,880
|
|
|
$
|
7,389
|
|
|
$
|
6,231
|
|
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The following table shows loans that were considered impaired, exclusive of purchased credit impaired loans, as of the dates indicated (dollars in thousands):
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Accruing
|
$
|
848
|
|
|
$
|
1,016
|
|
|
$
|
2,059
|
|
|
$
|
1,171
|
|
|
$
|
989
|
|
On nonaccrual status
|
486
|
|
|
2,201
|
|
|
2,785
|
|
|
3,536
|
|
|
3,548
|
|
Total impaired loans
|
$
|
1,334
|
|
|
$
|
3,217
|
|
|
$
|
4,844
|
|
|
$
|
4,707
|
|
|
$
|
4,537
|
|
Troubled Debt Restructurings ("TDRs")
TDRs exist whenever the Company makes a concession to a customer based on the customer's financial distress that would not have otherwise been made in the normal course of business.
There were $1,090,000 in TDRs at
December 31, 2018
compared to $1,306,000 at
December 31, 2017
.
Other Real Estate Owned
Other real estate owned is carried on the consolidated balance sheets at $869,000 and $1,225,000 as of
December 31, 2018
and
2017
, respectively. Foreclosed assets are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure. Loan losses resulting from foreclosure are charged against the ALLL at that time. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value, less estimated costs to sell with any additional write-downs charged against earnings. For significant assets, these valuations are
typically outside annual appraisals. The following table shows OREO as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Construction and land development
|
$
|
78
|
|
|
$
|
318
|
|
|
$
|
139
|
|
|
$
|
886
|
|
|
$
|
1,577
|
|
1-4 family residential
|
719
|
|
|
629
|
|
|
653
|
|
|
643
|
|
|
382
|
|
Commercial real estate
|
72
|
|
|
278
|
|
|
536
|
|
|
655
|
|
|
160
|
|
Total OREO
|
$
|
869
|
|
|
$
|
1,225
|
|
|
$
|
1,328
|
|
|
$
|
2,184
|
|
|
$
|
2,119
|
|
Deposits
The Company's deposits consist primarily of checking, money market, savings, and consumer and commercial time deposits. Average deposits increased $101,857,000, or 7.0%, in
2018
, after increasing $153,139,000, or 11.8%, in
2017
. This growth is mostly in non-maturity, core deposits, the heart of the Company's balance sheet.
Period-end total deposits increased $31,501,000, or 2.1%, during
2018
. The increase was primarily related to steady growth in core deposits, which is consistent with the Company's asset liability strategy. The Company has only a relatively small portion of its time deposits provided by wholesale sources. These include brokered time deposits, of which there were none at year end
2018
,
2017
, and
2016
, and time deposits through the CDARS program, which at year end totaled $22,431,000 for
2018
, $25,838,000 for
2017
, and $23,445,000 for
2016
. Management considers the CDARS deposits the functional, though not regulatory, equivalent of core deposits, because they relate to balances derived from customers with long standing relationships with the Company.
Average deposits and rates for the years indicated (dollars in thousands):
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Average
Balance
|
|
Rate
|
|
Average
Balance
|
|
Rate
|
|
Average
Balance
|
|
Rate
|
Noninterest bearing deposits
|
$
|
421,527
|
|
|
—
|
%
|
|
$
|
392,663
|
|
|
—
|
%
|
|
$
|
330,315
|
|
|
—
|
%
|
Interest bearing accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
$
|
234,857
|
|
|
0.02
|
%
|
|
$
|
217,833
|
|
|
0.02
|
%
|
|
$
|
216,521
|
|
|
0.05
|
%
|
Money market
|
393,321
|
|
|
0.89
|
|
|
335,085
|
|
|
0.50
|
|
|
239,262
|
|
|
0.18
|
|
Savings
|
132,182
|
|
|
0.03
|
|
|
125,157
|
|
|
0.03
|
|
|
118,144
|
|
|
0.04
|
|
Time
|
374,152
|
|
|
1.20
|
|
|
383,444
|
|
|
1.05
|
|
|
396,801
|
|
|
1.14
|
|
Total interest bearing deposits
|
$
|
1,134,512
|
|
|
0.71
|
%
|
|
$
|
1,061,519
|
|
|
0.55
|
%
|
|
$
|
970,728
|
|
|
0.53
|
%
|
Average total deposits
|
$
|
1,556,039
|
|
|
0.52
|
%
|
|
$
|
1,454,182
|
|
|
0.40
|
%
|
|
$
|
1,301,043
|
|
|
0.40
|
%
|
Certificates of Deposit of $100,000 or More
Certificates of deposit at
December 31, 2018
in amounts of $100,000 or more were classified by maturity as follows (dollars in thousands):
|
|
|
|
|
|
December 31, 2018
|
3 months or less
|
$
|
24,331
|
|
Over 3 through 6 months
|
22,403
|
|
Over 6 through 12 months
|
49,526
|
|
Over 12 months
|
158,706
|
|
Total
|
$
|
254,966
|
|
Certificates of Deposit of $250,000 or More
Certificates of deposit at
December 31, 2018
in amounts of $250,000 or more were classified by maturity as follows (dollars in thousands):
|
|
|
|
|
|
December 31, 2018
|
3 months or less
|
$
|
9,208
|
|
Over 3 through 6 months
|
12,993
|
|
Over 6 through 12 months
|
29,495
|
|
Over 12 months
|
108,300
|
|
Total
|
$
|
159,996
|
|
Borrowed Funds
In addition to internal deposit generation, the Company also relies on borrowed funds as a supplemental source of funding. Borrowed funds consist of customer repurchase agreements, overnight borrowings from the FHLB and longer-term FHLB advances, and trust preferred capital notes. Customer repurchase agreements are borrowings collateralized by securities of the U.S. Government, its agencies, or Government Sponsored Enterprises ("GSEs") and generally mature daily. The Company considers these accounts to be a stable and low cost source of funds. The securities underlying these agreements remain under the Company's control. Refer to Notes 10 and 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion of long-term debt.
The following table presents information pertaining to the Company's short-term borrowed funds as of the dates indicated (dollars in thousands):
Short-Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Customer repurchase agreements
|
|
$
|
35,243
|
|
|
$
|
10,726
|
|
FHLB overnight borrowings
|
|
—
|
|
|
24,000
|
|
Total
|
|
$
|
35,243
|
|
|
$
|
34,726
|
|
|
|
|
|
|
Weighted interest rate
|
|
1.67
|
%
|
|
1.10
|
%
|
|
|
|
|
|
Average for the year ended:
|
|
|
|
|
|
|
Outstanding
|
|
$
|
19,550
|
|
|
$
|
49,493
|
|
Interest rate
|
|
0.95
|
%
|
|
0.35
|
%
|
|
|
|
|
|
Maximum month-end outstanding
|
|
$
|
39,157
|
|
|
$
|
63,921
|
|
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At
December 31, 2018
, the Bank's public deposits totaled $258,566,000. The Company is legally required to provide collateral to secure the deposits that exceed the insurance coverage provided by the FDIC. This collateral can be provided in the form of certain types of government agency bonds or letters of credit from the FHLB. At year-end
2018
, the Company had $190,000,000 in letters of credit with the FHLB outstanding to supplement collateral for such deposits.
Shareholders' Equity
The Company's goal with capital management is to comply with all regulatory capital requirements and to support growth, while generating acceptable returns on equity and paying a high rate of dividends.
Shareholders' equity was $222,542,000 at
December 31, 2018
and $208,717,000 at
December 31, 2017
.
The Company declared and paid quarterly dividends totaling $1.00 per share for
2018
, $0.97 per share for
2017
, and $0.96 per share for
2016
. Cash dividends in
2018
totaled $8,702,000 and represented a 38.5% payout of
2018
net income, compared to a 55.0% payout in
2017
, and a 50.7% payout in
2016
.
Effective January 1, 2015, the Company and the Bank became subject to the Basel III Capital Rules. The Basel III Capital Rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum
ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. In addition, to be well capitalized under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA, the Bank must have the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.
The following table represents the major regulatory capital ratios for the Company as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
Risk-Based Capital Ratios:
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio
|
12.55
|
%
|
|
11.50
|
%
|
|
11.77
|
%
|
|
12.88
|
%
|
|
NA
|
|
Tier 1 capital ratio
|
14.46
|
%
|
|
13.42
|
%
|
|
13.83
|
%
|
|
15.23
|
%
|
|
16.59
|
%
|
Total capital ratio
|
15.35
|
%
|
|
14.39
|
%
|
|
14.81
|
%
|
|
16.34
|
%
|
|
17.86
|
%
|
|
|
|
|
|
|
|
|
|
|
Leverage Capital Ratios:
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
11.62
|
%
|
|
10.95
|
%
|
|
11.67
|
%
|
|
12.05
|
%
|
|
12.16
|
%
|
Management believes the Company is in compliance with all regulatory capital requirements applicable to it and the Bank meets the requirements to be considered "well capitalized" under the prompt corrective action framework as of
December 31, 2018
and
2017
.
Stock Repurchase Programs
On November 19, 2015, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of a stock repurchase program. The program authorized the repurchase of up to 300,000 shares of the Company's common stock over a two year period. The share purchase limit was established at such number of shares equal to approximately 3.5% of the 8,622,000 common shares then outstanding at the time the Board of Directors approved the program. The program expired on November 19, 2017.
On January 19, 2018, the Company filed a Form 8-K with the SEC to announce the approval by its Board of Directors of another stock repurchase program. The program authorizes the repurchase of up to 300,000 shares of the Company's common stock over a two year period.
The Company did not repurchase any shares during
2018
and
2017
.
CONTRACTUAL OBLIGATIONS
The following items are contractual obligations of the Company as of
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
Total
|
|
Under 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 years
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
361,957
|
|
|
$
|
140,563
|
|
|
$
|
133,918
|
|
|
$
|
83,204
|
|
|
$
|
4,272
|
|
Repurchase agreements
|
35,243
|
|
|
35,243
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating leases
|
5,543
|
|
|
883
|
|
|
1,481
|
|
|
1,291
|
|
|
1,888
|
|
Junior subordinated debt
|
27,927
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,927
|
|
OFF-BALANCE SHEET ACTIVITIES
The Company enters into certain financial transactions in the ordinary course of performing traditional banking services that result in off-balance sheet transactions. Other than AMNB Statutory Trust I, formed in 2006 to issue trust preferred securities, and MidCarolina Trust I and MidCarolina Trust II, the Company does not have any off-balance sheet subsidiaries. Refer to Note 11 of the Consolidated Financial Statements contained in Item 8 of this Form 10-K for a discussion
of junior subordinated debt. Off-balance sheet transactions were as follows as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
Off-Balance Sheet Commitments
|
2018
|
|
2017
|
|
|
|
|
Commitments to extend credit
|
$
|
362,586
|
|
|
$
|
341,760
|
|
Standby letters of credit
|
15,555
|
|
|
13,647
|
|
Mortgage loan rate-lock commitments
|
9,710
|
|
|
5,089
|
|
Commitments to extend credit to customers represent legally binding agreements with fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future funding requirements. Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements.
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Results
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
2018
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
16,668
|
|
|
$
|
16,992
|
|
|
$
|
17,217
|
|
|
$
|
17,891
|
|
|
$
|
68,768
|
|
Interest expense
|
2,125
|
|
|
2,204
|
|
|
2,466
|
|
|
2,879
|
|
|
9,674
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
14,543
|
|
|
14,788
|
|
|
14,751
|
|
|
15,012
|
|
|
59,094
|
|
Provision for (recovery of) loan losses
|
(44
|
)
|
|
(30
|
)
|
|
(23
|
)
|
|
(6
|
)
|
|
(103
|
)
|
Net interest income after provision
for loan losses
|
14,587
|
|
|
14,818
|
|
|
14,774
|
|
|
15,018
|
|
|
59,197
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
3,333
|
|
|
3,563
|
|
|
3,380
|
|
|
2,998
|
|
|
13,274
|
|
Noninterest expense
|
10,702
|
|
|
11,002
|
|
|
10,904
|
|
|
11,638
|
|
|
44,246
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
7,218
|
|
|
7,379
|
|
|
7,250
|
|
|
6,378
|
|
|
28,225
|
|
Income taxes
|
1,406
|
|
|
1,399
|
|
|
1,465
|
|
|
1,376
|
|
|
5,646
|
|
Net income
|
$
|
5,812
|
|
|
$
|
5,980
|
|
|
$
|
5,785
|
|
|
$
|
5,002
|
|
|
$
|
22,579
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - basic
|
$
|
0.67
|
|
|
$
|
0.69
|
|
|
$
|
0.66
|
|
|
$
|
0.57
|
|
|
$
|
2.60
|
|
Net income - diluted
|
0.67
|
|
|
0.69
|
|
|
0.66
|
|
|
0.57
|
|
|
2.59
|
|
Cash dividends
|
0.25
|
|
|
0.25
|
|
|
0.25
|
|
|
0.25
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
2017
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
14,681
|
|
|
$
|
15,603
|
|
|
$
|
16,274
|
|
|
$
|
16,480
|
|
|
$
|
63,038
|
|
Interest expense
|
1,547
|
|
|
1,691
|
|
|
1,936
|
|
|
2,117
|
|
|
7,291
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
13,134
|
|
|
13,912
|
|
|
14,338
|
|
|
14,363
|
|
|
55,747
|
|
Provision for (recovery of) loan losses
|
300
|
|
|
350
|
|
|
440
|
|
|
(74
|
)
|
|
1,016
|
|
Net interest income after provision
for loan losses
|
12,834
|
|
|
13,562
|
|
|
13,898
|
|
|
14,437
|
|
|
54,731
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
3,271
|
|
|
3,348
|
|
|
3,804
|
|
|
3,804
|
|
|
14,227
|
|
Noninterest expense
|
10,441
|
|
|
10,711
|
|
|
10,710
|
|
|
11,021
|
|
|
42,883
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
5,664
|
|
|
6,199
|
|
|
6,992
|
|
|
7,220
|
|
|
26,075
|
|
Income taxes
|
1,601
|
|
|
1,920
|
|
|
2,205
|
|
|
5,100
|
|
|
10,826
|
|
Net income
|
$
|
4,063
|
|
|
$
|
4,279
|
|
|
$
|
4,787
|
|
|
$
|
2,120
|
|
|
$
|
15,249
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - basic
|
$
|
0.47
|
|
|
$
|
0.49
|
|
|
$
|
0.55
|
|
|
$
|
0.25
|
|
|
$
|
1.76
|
|
Net income - diluted
|
0.47
|
|
|
0.49
|
|
|
0.55
|
|
|
0.25
|
|
|
1.76
|
|
Cash dividends
|
0.24
|
|
|
0.24
|
|
|
0.24
|
|
|
0.25
|
|
|
0.97
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American National Bankshares Inc. and Subsidiary (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 8, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company's auditor since 2002.
Winchester, Virginia
March 8, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
American National Bankshares Inc.
Danville, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited American National Bankshares Inc. and Subsidiary’s (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements of the Company and our report dated March 8, 2019 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 8, 2019
American National Bankshares Inc.
Consolidated Balance Sheets
As of
December 31, 2018
and
2017
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
ASSETS
|
2018
|
|
2017
|
Cash and due from banks
|
$
|
29,587
|
|
|
$
|
28,594
|
|
Interest-bearing deposits in other banks
|
34,668
|
|
|
23,883
|
|
|
|
|
|
Equity securities, at fair value
|
1,830
|
|
|
—
|
|
Securities available for sale, at fair value
|
332,653
|
|
|
321,337
|
|
Restricted stock, at cost
|
5,247
|
|
|
6,110
|
|
Loans held for sale
|
640
|
|
|
1,639
|
|
|
|
|
|
Loans, net of unearned income
|
1,357,476
|
|
|
1,336,125
|
|
Less allowance for loan losses
|
(12,805
|
)
|
|
(13,603
|
)
|
Net loans
|
1,344,671
|
|
|
1,322,522
|
|
|
|
|
|
Premises and equipment, net
|
26,675
|
|
|
25,901
|
|
Other real estate owned, net of valuation allowance of $109 in 2018 and $147 in 2017
|
869
|
|
|
1,225
|
|
Goodwill
|
43,872
|
|
|
43,872
|
|
Core deposit intangibles, net
|
926
|
|
|
1,191
|
|
Bank owned life insurance
|
18,941
|
|
|
18,460
|
|
Accrued interest receivable and other assets
|
22,287
|
|
|
21,344
|
|
Total assets
|
$
|
1,862,866
|
|
|
$
|
1,816,078
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS' EQUITY
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Demand deposits -- noninterest bearing
|
$
|
435,828
|
|
|
$
|
394,344
|
|
Demand deposits -- interest bearing
|
234,621
|
|
|
226,914
|
|
Money market deposits
|
401,461
|
|
|
403,024
|
|
Savings deposits
|
132,360
|
|
|
126,786
|
|
Time deposits
|
361,957
|
|
|
383,658
|
|
Total deposits
|
1,566,227
|
|
|
1,534,726
|
|
|
|
|
|
Short-term borrowings:
|
|
|
|
Customer repurchase agreements
|
35,243
|
|
|
10,726
|
|
Other short-term borrowings
|
—
|
|
|
24,000
|
|
Junior subordinated debt
|
27,927
|
|
|
27,826
|
|
Accrued interest payable and other liabilities
|
10,927
|
|
|
10,083
|
|
Total liabilities
|
1,640,324
|
|
|
1,607,361
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
Preferred stock, $5 par, 2,000,000 shares authorized, none outstanding
|
—
|
|
|
—
|
|
Common stock, $1 par, 20,000,000 shares authorized, 8,720,337 shares outstanding at December 31, 2018 and 8,650,547 shares outstanding at December 31, 2017
|
8,668
|
|
|
8,604
|
|
Capital in excess of par value
|
78,172
|
|
|
76,179
|
|
Retained earnings
|
141,537
|
|
|
127,010
|
|
Accumulated other comprehensive loss, net
|
(5,835
|
)
|
|
(3,076
|
)
|
Total shareholders' equity
|
222,542
|
|
|
208,717
|
|
Total liabilities and shareholders' equity
|
$
|
1,862,866
|
|
|
$
|
1,816,078
|
|
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Income
For the Years Ended
December 31, 2018
,
2017
, and
2016
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Interest and Dividend Income:
|
|
|
|
|
|
Interest and fees on loans
|
$
|
59,966
|
|
|
$
|
55,276
|
|
|
$
|
47,971
|
|
Interest and dividends on securities:
|
|
|
|
|
|
|
|
|
Taxable
|
6,106
|
|
|
4,666
|
|
|
4,454
|
|
Tax-exempt
|
1,502
|
|
|
2,043
|
|
|
3,135
|
|
Dividends
|
321
|
|
|
319
|
|
|
334
|
|
Other interest income
|
873
|
|
|
734
|
|
|
276
|
|
Total interest and dividend income
|
68,768
|
|
|
63,038
|
|
|
56,170
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
8,086
|
|
|
5,794
|
|
|
5,103
|
|
Interest on short-term borrowings
|
186
|
|
|
173
|
|
|
10
|
|
Interest on long-term borrowings
|
—
|
|
|
296
|
|
|
325
|
|
Interest on junior subordinated debt
|
1,402
|
|
|
1,028
|
|
|
878
|
|
Total interest expense
|
9,674
|
|
|
7,291
|
|
|
6,316
|
|
Net Interest Income
|
59,094
|
|
|
55,747
|
|
|
49,854
|
|
Provision for (recovery of) loan losses
|
(103
|
)
|
|
1,016
|
|
|
250
|
|
Net Interest Income after Provision for Loan Losses
|
59,197
|
|
|
54,731
|
|
|
49,604
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
Trust fees
|
3,783
|
|
|
3,926
|
|
|
3,791
|
|
Service charges on deposit accounts
|
2,455
|
|
|
2,426
|
|
|
2,467
|
|
Other fees and commissions
|
2,637
|
|
|
2,471
|
|
|
2,261
|
|
Mortgage banking income
|
1,862
|
|
|
2,208
|
|
|
1,713
|
|
Securities gains, net
|
123
|
|
|
812
|
|
|
836
|
|
Brokerage fees
|
795
|
|
|
829
|
|
|
843
|
|
Income from Small Business Investment Companies
|
637
|
|
|
236
|
|
|
463
|
|
Gains (losses) on premises and equipment, net
|
60
|
|
|
344
|
|
|
(9
|
)
|
Other
|
922
|
|
|
975
|
|
|
1,140
|
|
Total noninterest income
|
13,274
|
|
|
14,227
|
|
|
13,505
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
Salaries
|
20,509
|
|
|
19,829
|
|
|
17,568
|
|
Employee benefits
|
4,370
|
|
|
4,274
|
|
|
3,829
|
|
Occupancy and equipment
|
4,378
|
|
|
4,487
|
|
|
4,246
|
|
FDIC assessment
|
537
|
|
|
538
|
|
|
647
|
|
Bank franchise tax
|
1,054
|
|
|
1,072
|
|
|
995
|
|
Core deposit intangible amortization
|
265
|
|
|
528
|
|
|
964
|
|
Data processing
|
1,691
|
|
|
2,014
|
|
|
1,828
|
|
Software
|
1,279
|
|
|
1,144
|
|
|
1,143
|
|
Other real estate owned, net
|
122
|
|
|
303
|
|
|
336
|
|
Merger related expenses
|
872
|
|
|
—
|
|
|
—
|
|
Other
|
9,169
|
|
|
8,694
|
|
|
8,245
|
|
Total noninterest expense
|
44,246
|
|
|
42,883
|
|
|
39,801
|
|
Income Before Income Taxes
|
28,225
|
|
|
26,075
|
|
|
23,308
|
|
Income Taxes
|
5,646
|
|
|
10,826
|
|
|
7,007
|
|
Net Income
|
$
|
22,579
|
|
|
$
|
15,249
|
|
|
$
|
16,301
|
|
Net Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.60
|
|
|
$
|
1.76
|
|
|
$
|
1.89
|
|
Diluted
|
$
|
2.59
|
|
|
$
|
1.76
|
|
|
$
|
1.89
|
|
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
8,698,014
|
|
|
8,641,717
|
|
|
8,611,507
|
|
Diluted
|
8,708,462
|
|
|
8,660,628
|
|
|
8,621,241
|
|
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended
December 31, 2018
,
2017
, and
2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income
|
$
|
22,579
|
|
|
$
|
15,249
|
|
|
$
|
16,301
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities available for sale
|
(3,209
|
)
|
|
35
|
|
|
(5,736
|
)
|
Tax effect
|
745
|
|
|
(12
|
)
|
|
2,007
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains on securities
|
(81
|
)
|
|
(812
|
)
|
|
(836
|
)
|
Tax effect
|
18
|
|
|
284
|
|
|
293
|
|
|
|
|
|
|
|
Unrealized losses on cash flow hedges
|
(804
|
)
|
|
—
|
|
|
—
|
|
Tax effect
|
180
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Change in unfunded pension liability
|
1,291
|
|
|
(234
|
)
|
|
166
|
|
Tax effect
|
(249
|
)
|
|
82
|
|
|
(58
|
)
|
|
|
|
|
|
|
Other comprehensive loss
|
(2,109
|
)
|
|
(657
|
)
|
|
(4,164
|
)
|
|
|
|
|
|
|
Comprehensive income
|
$
|
20,470
|
|
|
$
|
14,592
|
|
|
$
|
12,137
|
|
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended
December 31, 2018
,
2017
, and
2016
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Capital in
Excess of
Par Value
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Shareholders'
Equity
|
Balance, December 31, 2015
|
$
|
8,605
|
|
|
$
|
75,375
|
|
|
$
|
111,565
|
|
|
$
|
2,290
|
|
|
$
|
197,835
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
16,301
|
|
|
—
|
|
|
16,301
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,164
|
)
|
|
(4,164
|
)
|
Stock repurchased (51,384 shares)
|
(51
|
)
|
|
(1,241
|
)
|
|
—
|
|
|
—
|
|
|
(1,292
|
)
|
Stock options exercised (5,784 shares)
|
6
|
|
|
136
|
|
|
—
|
|
|
—
|
|
|
142
|
|
Vesting of restricted stock (5,510 shares)
|
5
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity based compensation (41,644 shares)
|
13
|
|
|
811
|
|
|
—
|
|
|
—
|
|
|
824
|
|
Cash dividends paid, $0.96 per share
|
—
|
|
|
—
|
|
|
(8,266
|
)
|
|
—
|
|
|
(8,266
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
8,578
|
|
|
75,076
|
|
|
119,600
|
|
|
(1,874
|
)
|
|
201,380
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
15,249
|
|
|
—
|
|
|
15,249
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(657
|
)
|
|
(657
|
)
|
Reclass "stranded" tax effects from tax rate change
|
—
|
|
|
—
|
|
|
545
|
|
|
(545
|
)
|
|
—
|
|
Stock options exercised (4,950 shares)
|
5
|
|
|
108
|
|
|
—
|
|
|
—
|
|
|
113
|
|
Vesting of restricted stock (8,116 shares)
|
8
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity based compensation (27,546 shares)
|
13
|
|
|
1,003
|
|
|
—
|
|
|
—
|
|
|
1,016
|
|
Cash dividends paid, $0.97 per share
|
—
|
|
|
—
|
|
|
(8,384
|
)
|
|
—
|
|
|
(8,384
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
8,604
|
|
|
76,179
|
|
|
127,010
|
|
|
(3,076
|
)
|
|
208,717
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
22,579
|
|
|
—
|
|
|
22,579
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,109
|
)
|
|
(2,109
|
)
|
Reclassification for ASU 2016-01 adoption*
|
—
|
|
|
—
|
|
|
650
|
|
|
(650
|
)
|
|
—
|
|
Stock options exercised (35,310 shares)
|
35
|
|
|
826
|
|
|
—
|
|
|
—
|
|
|
861
|
|
Vesting of restricted stock (12,712 shares)
|
13
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity based compensation (34,480 shares)
|
16
|
|
|
1,180
|
|
|
—
|
|
|
—
|
|
|
1,196
|
|
Cash dividends paid, $1.00 per share
|
—
|
|
|
—
|
|
|
(8,702
|
)
|
|
—
|
|
|
(8,702
|
)
|
Balance, December 31, 2018
|
$
|
8,668
|
|
|
$
|
78,172
|
|
|
$
|
141,537
|
|
|
$
|
(5,835
|
)
|
|
$
|
222,542
|
|
The accompanying notes are an integral part of the consolidated financial statements.
* See Note 1 for Comprehensive Income and Adoption of New Accounting Standards.
American National Bankshares Inc.
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 2018
,
2017
, and
2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income
|
$
|
22,579
|
|
|
$
|
15,249
|
|
|
$
|
16,301
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for (recovery of) loan losses
|
(103
|
)
|
|
1,016
|
|
|
250
|
|
Depreciation
|
1,775
|
|
|
1,877
|
|
|
1,892
|
|
Net accretion of acquisition accounting adjustments
|
(1,288
|
)
|
|
(2,114
|
)
|
|
(2,318
|
)
|
Core deposit intangible amortization
|
265
|
|
|
528
|
|
|
964
|
|
Net amortization of securities
|
1,617
|
|
|
1,831
|
|
|
2,678
|
|
Net gain on sale or call of securities available for sale
|
(81
|
)
|
|
(812
|
)
|
|
(836
|
)
|
Net unrealized holding gain on equity securities
|
(42
|
)
|
|
—
|
|
|
—
|
|
Gain on sale of loans held for sale
|
(1,862
|
)
|
|
(1,765
|
)
|
|
(1,328
|
)
|
Proceeds from sales of loans held for sale
|
80,600
|
|
|
92,733
|
|
|
76,928
|
|
Originations of loans held for sale
|
(77,739
|
)
|
|
(86,611
|
)
|
|
(78,330
|
)
|
Net loss on other real estate owned
|
14
|
|
|
22
|
|
|
72
|
|
Valuation allowance on other real estate owned
|
30
|
|
|
143
|
|
|
156
|
|
Net loss (gain) on sale of premises and equipment
|
(60
|
)
|
|
(344
|
)
|
|
9
|
|
Equity based compensation expense
|
1,196
|
|
|
1,016
|
|
|
824
|
|
Net change in bank owned life insurance
|
(481
|
)
|
|
(297
|
)
|
|
(505
|
)
|
Deferred income tax expense
|
556
|
|
|
3,471
|
|
|
882
|
|
Net change in interest receivable
|
(218
|
)
|
|
(148
|
)
|
|
(967
|
)
|
Net change in other assets
|
(100
|
)
|
|
(379
|
)
|
|
(1,390
|
)
|
Net change in interest payable
|
121
|
|
|
51
|
|
|
(32
|
)
|
Net change in other liabilities
|
723
|
|
|
284
|
|
|
867
|
|
Net cash provided by operating activities
|
27,502
|
|
|
25,751
|
|
|
16,117
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales of equity securities
|
431
|
|
|
—
|
|
|
—
|
|
Proceeds from sales of securities available for sale
|
57,607
|
|
|
55,903
|
|
|
13,019
|
|
Proceeds from maturities, calls and paydowns of securities available for sale
|
30,607
|
|
|
52,397
|
|
|
140,483
|
|
Purchases of securities available for sale
|
(106,575
|
)
|
|
(84,931
|
)
|
|
(168,069
|
)
|
Net change in restricted stock
|
863
|
|
|
114
|
|
|
(912
|
)
|
Net increase in loans
|
(21,256
|
)
|
|
(170,515
|
)
|
|
(157,198
|
)
|
Proceeds from sale of premises and equipment
|
234
|
|
|
653
|
|
|
1
|
|
Purchases of premises and equipment
|
(2,723
|
)
|
|
(2,648
|
)
|
|
(3,613
|
)
|
Proceeds from sales of other real estate owned
|
911
|
|
|
1,171
|
|
|
923
|
|
Net cash used in investing activities
|
(39,901
|
)
|
|
(147,856
|
)
|
|
(175,366
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net change in demand, money market, and savings deposits
|
53,202
|
|
|
159,283
|
|
|
126,435
|
|
Net change in time deposits
|
(21,701
|
)
|
|
4,803
|
|
|
(18,455
|
)
|
Net change in customer repurchase agreements
|
24,517
|
|
|
(28,440
|
)
|
|
(1,445
|
)
|
Net change in other short-term borrowings
|
(24,000
|
)
|
|
4,000
|
|
|
20,000
|
|
Net change in long-term borrowings
|
—
|
|
|
(10,000
|
)
|
|
—
|
|
Common stock dividends paid
|
(8,702
|
)
|
|
(8,384
|
)
|
|
(8,266
|
)
|
Repurchase of common stock
|
—
|
|
|
—
|
|
|
(1,292
|
)
|
Proceeds from exercise of stock options
|
861
|
|
|
113
|
|
|
142
|
|
Net cash provided by financing activities
|
24,177
|
|
|
121,375
|
|
|
117,119
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
11,778
|
|
|
(730
|
)
|
|
(42,130
|
)
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
52,477
|
|
|
53,207
|
|
|
95,337
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
64,255
|
|
|
$
|
52,477
|
|
|
$
|
53,207
|
|
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Notes to Consolidated Financial Statements
December 31, 2018
,
2017
, and
2016
Note 1
–
Summary of Significant Accounting Policies
Nature of Operations and Consolidation
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, unfunded pension liability, other-than-temporary impairment of securities, accounting for merger and acquisition activity, derivative financial instruments, accounting for acquired loans with specific credit-related deterioration, the valuation of other real estate owned ("OREO"), and the valuation of deferred tax assets and liabilities.
In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the "AMNB Trust") and an unconsolidated wholly owned subsidiary of the Company, was formed for the purpose of issuing preferred securities (the "Trust Preferred Securities") in a private placement pursuant to an applicable exemption from registration. Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation ("Community First") which occurred in April 2006.
In July 2011, and in connection with its acquisition of MidCarolina Financial Corporation, the Company assumed liabilities of MidCarolina Trust I and MidCarolina Trust II,
two
separate unconsolidated Delaware statutory trusts (the "MidCarolina Trusts"), which were also formed for the purpose of issuing preferred securities. Refer to Note 11 for further details concerning these entities.
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 11.
Cash and Cash Equivalents
Cash includes cash on hand, cash with correspondent banks, and cash on deposit at the Federal Reserve Bank of Richmond. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with original maturities of
three months
or less and are subject to an insignificant risk of change in value. Cash and cash equivalents are carried at cost.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks mature within
one year
and are carried at cost.
Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Debt securities not classified as held to maturity or trading are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The Company does not currently have any securities in held to maturity or trading and has no plans to add any to either category. Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement
to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and, (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Equity securities with readily determinable fair values that are not held for trading are carried at fair value with the unrealized gains and losses included in n
Due to the nature and restrictions placed on the Company's investment in common stock of the Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank of Richmond, these securities have been classified as restricted equity securities and carried at cost.
Loans Held for Sale
Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income.
Derivative Loan Commitments
The Company enters into mortgage loan commitments whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets with net changes in their fair values recorded in other expenses. Derivative loan commitments resulted in
no
income or loss for
2018
,
2017
or
2016
.
The period of time between issuance of a loan commitment and sale of the loan generally ranges from
30
to
60 days
. The Company protects itself from changes in interest rates through the use of best efforts forward delivery contracts, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to significant losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.
The fair value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the estimated value of the underlying assets while taking into consideration the probability that the loan will be funded.
Loans
The Company makes mortgage, commercial, and consumer loans. A substantial portion of the loan portfolio is secured by real estate. The ability of the Company's debtors to honor their contracts is dependent upon the real estate market and general economic conditions in the Company's market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, generally are reported at their outstanding unpaid principal balance adjusted for the allowance for loan losses, and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is generally discontinued at the time the loan is
90 days
delinquent unless the credit is well-secured and in process of collection. Loans are typically charged off when the loan is
120 days
past due, unless secured and in process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A loan is considered past due when a payment of principal or interest or both is due but not paid. Management closely monitors past due loans in timeframes of 30-59 days, 60-89 days, and 90 or more days past due.
These policies apply to all loan portfolio classes and segments.
Substandard and doubtful risk graded commercial, commercial real estate, and construction loans equal to or greater than
$100,000
are reviewed for impairment. All troubled debt restructurings ("TDRs"), regardless of dollar amount, are also evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment and establishing a specific allowance 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 on a loan-by-loan basis for commercial, commercial real estate, and construction loans by either the present value of 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.
Generally, large groups of smaller balance homogeneous loans (residential real estate and consumer loans) are collectively evaluated for impairment. The Company's policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy.
The Company's loan portfolio is organized by major segment. These include: commercial, commercial real estate, residential real estate and consumer loans. Each segment has particular risk characteristics that are specific to the borrower and the generic category of credit. Commercial loan repayments are highly dependent on cash flows associated with the underlying business and its profitability. They can also be impacted by changes in collateral values. Commercial real estate loans share the same general risk characteristics as commercial loans, but are often more dependent on the value of the underlying real estate collateral and, when construction is involved, the ultimate completion of and sale of the project. Residential real estate loans are generally dependent on the value of collateral and the credit worthiness of the underlying borrower. Consumer loans are very similar in risk characteristics to residential real estate.
In connection with mergers, certain loans were acquired which exhibited deteriorated credit quality since origination and for which the Company does not expect to collect all contractual payments. These purchased credit impaired loans are accounted for in accordance with ASC 310-30,
Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality
, and are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower's financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. The Company has
$1,090,000
in loans classified as TDRs as of
December 31, 2018
and
$1,306,000
as of
December 31, 2017
.
Allowance for Loan Losses
The purpose of the allowance for loan losses ("ALLL") is to provide for probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and by recoveries of previously charged-off loans. Loan charge-offs decrease the allowance.
The goal of the Company is to maintain an appropriate, systematic, and consistently applied process to determine the amounts of the ALLL and the provision for loan loss expense.
The Company uses certain practices to manage its credit risk. These practices include (1) appropriate lending limits for loan officers, (2) a loan approval process, (3) careful underwriting of loan requests, including analysis of borrowers, cash flows, collateral, and market risks, (4) regular monitoring of the portfolio, including diversification by type and geography, (5) review of loans by the Loan Review department, which operates independently of loan production (the Loan Review function consists of a co-sourced arrangement using both internal personnel and external vendors to provide the Company with a more robust review function of the loan portfolio), (6) regular meetings of the Credit Committees to discuss portfolio and policy changes and make decisions on large or unusual loan requests, and (7) regular meetings of the Asset Quality Committee which reviews the status of individual loans.
Risk grades are assigned as part of the loan origination process. From time to time risk grades may be modified as warranted by the facts and circumstances surrounding the credit.
Calculation and analysis of the allowance for loan losses is prepared quarterly by the Finance Department. The Company's Credit Committee, Risk and Compliance Committee, Audit Committee, and the Board of Directors review the allowance for adequacy.
The Company's allowance for loan losses has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates and judgments.
The formula allowance uses historical loss experience as an indicator of future losses, along with various qualitative factors, including levels and trends in delinquencies, nonaccrual loans, charge-offs and recoveries, trends in volume and terms of loans, effects of changes in underwriting standards, experience of lending staff, economic conditions, and portfolio concentrations. In the formula allowance for commercial and commercial real estate loans, the historical loss rate is combined with the qualitative factors, resulting in an adjusted loss factor for each risk-grade category of loans. The period-end balances for each loan risk-grade category are multiplied by the adjusted loss factor. Allowance calculations for consumer loans are calculated based on historical losses for each product category without regard to risk grade. This loss rate is combined with qualitative factors resulting in an adjusted loss factor for each product category.
The specific allowance uses various techniques to arrive at an estimate of loss for specifically identified impaired loans. These include:
|
|
•
|
The present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan (that is, the contractual interest rate adjusted for any net deferred loan fees or costs and any premium or discount existing at the origination or acquisition of the loan);
|
|
|
•
|
The loan's observable market price, or
|
|
|
•
|
The fair value of the collateral, net of estimated costs to dispose, if the loan is collateral dependent.
|
The use of these computed values is inherently subjective and actual losses could be greater or less than the estimates. No single statistic, formula, or measurement determines the adequacy of the allowance. Management makes subjective and complex judgments about matters that are inherently uncertain, and different amounts would be reported under different conditions or using different assumptions. For analytical purposes, management allocates a portion of the allowance to specific loan categories and specific loans. However, the entire allowance is used to absorb credit losses inherent in the loan portfolio, including identified and unidentified losses.
The relationships and ratios used in calculating the allowance, including the qualitative factors, may change from period to period as facts and circumstances evolve. Furthermore, management cannot provide assurance that in any particular period the Company will not have sizeable credit losses in relation to the amount reserved. Management may find it necessary to significantly adjust the allowance, considering current factors at the time.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives ranging from
three years
to
thirty-nine years
;
leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is less. Software is generally amortized over
three years
. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate. Gains and losses on routine dispositions are reflected in current operations.
Goodwill and Intangible Assets
Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to branch transactions continued to amortize. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives ranging from
eight
to
ten
years.
The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis as of June 30 each fiscal year. Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. No indicators of impairment were identified during the years ended
December 31, 2018
,
2017
, or
2016
.
Trust Assets
Securities and other property held by the trust and investment services segment in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Other Real Estate Owned
OREO represents real estate that has been acquired through loan foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised at the time acquired, and are recorded at fair value less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense.
Bank Owned Life Insurance
The Company has acquired bank owned life insurance ("BOLI") in connection with
three
acquisitions. The asset is reflected as the cash surrender value of the policies as provided by the insurer on a monthly basis.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes
The Company uses the balance sheet method to account for deferred income tax assets and liabilities. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company had
no
liability for unrecognized tax benefits as of
December 31, 2018
and
2017
.
Stock-Based Compensation
Stock compensation accounting guidance Accounting Standards Codification ("ASC") 718,
Compensation - Stock Compensation
, requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Earnings Per Common Share
Basic earnings per common share represent income available to common shareholders divided by the average number of common shares outstanding during the period. Diluted earnings per common share reflect the impact of additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company consist solely of outstanding stock options, and are determined using the treasury method. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period.
Comprehensive Income
Comprehensive income is shown in a two statement approach; the first statement presents total net income and its components followed by a second statement that presents all the components of other comprehensive income which include unrealized gains and losses on available for sale securities, unrealized gains and losses on cash flow hedges, and changes in the funded status of the defined benefit postretirement plan.
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI")
.
The Company early adopted this new standard as of December 31, 2017. ASU 2018-02 requires reclassification from AOCI to retained earnings for "stranded" tax effects resulting from the impact of the newly enacted federal corporate income tax rate on items included in AOCI. The amount of this reclassification in 2017 was
$545,000
and is reflected in the Consolidated Statements of Changes in Shareholders' equity.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred, and were
$365,000
,
$352,000
, and
$260,000
in
2018
,
2017
, and
2016
, respectively.
Mergers and Acquisitions
Business combinations are accounted for under ASC 805,
Business Combinations
, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable
GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expense caption.
Derivative Financial Instruments
The Company uses derivatives primarily to manage risk associated with changing interest rates. The Company's derivative financial instruments consist of interest rate swaps that qualify as cash flow hedges of the Company's trust preferred capital notes. The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheets. The effective portion of the gain or loss on the Company's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and is reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
Reclassifications
Certain reclassifications have been made in prior years financial statements to conform to classifications used in the current year. There were no material reclassifications.
Use of Estimates
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, unfunded pension liability, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, the valuation of OREO, and the valuation of deferred tax assets and liabilities.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amended the guidance on the classification and measurement of financial instruments. Upon adoption of ASU 2016-01, the Company reclassified
$650,000
from accumulated other comprehensive loss to retained earnings for the difference in amortized cost and fair value. In 2018, the Company recognized the equity securities fair value change in net income. Previously, the fair value changes were recognized, net of tax, in other comprehensive loss. The adoption of ASU 2016-01 did not have a material effect on the Company's consolidated financial statements.
During the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers", and all subsequent amendments to the ASU (collectively "ASC 606"), which (1) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (2) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company's revenue is from interest income, including loans and securities, that are outside the scope of the standard. The services that fall within the scope of the standard are presented within noninterest income on the consolidated statement of income and are recognized as revenue as the Company satisfies its obligations to the customer. The revenue that falls within the scope of ASC 606 is primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of OREO, insurance commissions and miscellaneous fees. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10, "Codification Improvements to Topic 842, Leases," and ASU 2018-11, "Leases (Topic 842): Targeted Improvements." Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The effect of adopting this standard on January 1, 2019 was an approximately
$4.4 million
increase in assets and liabilities on the Company's consolidated balance sheet.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission ("SEC") filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has implemented and completed a significant amount of a project plan with the assistance of an outside vendor. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company does not expect the adoption of ASU 2017-08 to have a material impact on consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. This ASU was further amended in October 2018 by ASU 2018-16, which adds the Overnight Index Swap rate as a U.S. benchmark interest rate. These amendments will be effective concurrently with ASU 2017-12. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements
.
In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.
Note 2 – Restrictions on Cash
The Company is a member of the Federal Reserve System and is required to maintain certain levels of its cash and cash equivalents as reserves based on regulatory requirements. The gross reserve requirement with the Federal Reserve Bank of Richmond was
$3.0 million
and
$2.8 million
at
December 31, 2018
and
2017
, respectively. Due to vault cash that exceeded the gross reserve requirement, the required balance to be maintained with the Federal Reserve Bank of Richmond was zero at both year ends.
The Company maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at
December 31, 2018
exceeded the insurance limits of the Federal Deposit Insurance Corporation by
$197,000
.
Note 3 - Securities
The amortized cost and estimated fair value of investments in securities at
December 31, 2018
and
2017
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Securities available for sale:
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
$
|
137,070
|
|
|
$
|
442
|
|
|
$
|
3,473
|
|
|
$
|
134,039
|
|
Mortgage-backed and CMOs
|
113,883
|
|
|
385
|
|
|
2,401
|
|
|
111,867
|
|
State and municipal
|
80,022
|
|
|
411
|
|
|
531
|
|
|
79,902
|
|
Corporate
|
6,799
|
|
|
68
|
|
|
22
|
|
|
6,845
|
|
Total securities available for sale
|
$
|
337,774
|
|
|
$
|
1,306
|
|
|
$
|
6,427
|
|
|
$
|
332,653
|
|
The Company adopted ASU 2016-01 effective January 1, 2018 and had equity securities with a fair value of
$1,830,000
at
December 31, 2018
and recognized in income
$42,000
of unrealized holding gains during
2018
. During the year ended
December 31, 2018
, the Company sold
$431,000
in equity securities at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
Securities available for sale:
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
$
|
114,246
|
|
|
$
|
8
|
|
|
$
|
2,127
|
|
|
$
|
112,127
|
|
Mortgage-backed and CMOs
|
106,163
|
|
|
293
|
|
|
1,140
|
|
|
105,316
|
|
State and municipal
|
92,711
|
|
|
1,262
|
|
|
347
|
|
|
93,626
|
|
Corporate
|
7,842
|
|
|
234
|
|
|
14
|
|
|
8,062
|
|
Equity securities
|
1,383
|
|
|
823
|
|
|
—
|
|
|
2,206
|
|
Total securities available for sale
|
$
|
322,345
|
|
|
$
|
2,620
|
|
|
$
|
3,628
|
|
|
$
|
321,337
|
|
The amortized cost and estimated fair value of investments in debt securities at
December 31, 2018
, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because mortgage-backed securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments, it is difficult to accurately predict the final maturity of these investments. Mortgage-backed securities are shown separately (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
Amortized
Cost
|
|
Fair Value
|
Due in one year or less
|
$
|
6,872
|
|
|
$
|
6,868
|
|
Due after one year through five years
|
115,573
|
|
|
114,672
|
|
Due after five years through ten years
|
75,996
|
|
|
74,952
|
|
Due after ten years
|
25,450
|
|
|
24,294
|
|
Mortgage-backed and CMOs
|
113,883
|
|
|
111,867
|
|
|
$
|
337,774
|
|
|
$
|
332,653
|
|
Gross realized gains and losses on and the proceeds from the sale of securities available for sale were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Gross realized gains
|
$
|
342
|
|
|
$
|
825
|
|
|
$
|
844
|
|
Gross realized losses
|
(261
|
)
|
|
(13
|
)
|
|
(8
|
)
|
Proceeds from sales of securities
|
57,607
|
|
|
55,903
|
|
|
13,019
|
|
Securities with a carrying value of approximately $
143,064,000
and
$166,284,000
at
December 31, 2018
and
2017
, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. FHLB letters of credit were used as additional collateral in the amounts of
$190,250,000
at
December 31, 2018
and
$190,700,000
at
December 31, 2017
.
Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2018
. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
Federal agencies and GSEs
|
$
|
103,797
|
|
|
$
|
3,473
|
|
|
$
|
14,982
|
|
|
$
|
8
|
|
|
$
|
88,815
|
|
|
$
|
3,465
|
|
Mortgage-backed and CMOs
|
86,852
|
|
|
2,401
|
|
|
5,473
|
|
|
15
|
|
|
81,379
|
|
|
2,386
|
|
State and municipal
|
39,755
|
|
|
531
|
|
|
7,199
|
|
|
18
|
|
|
32,556
|
|
|
513
|
|
Corporate
|
484
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
484
|
|
|
22
|
|
Total
|
$
|
230,888
|
|
|
$
|
6,427
|
|
|
$
|
27,654
|
|
|
$
|
41
|
|
|
$
|
203,234
|
|
|
$
|
6,386
|
|
Federal agencies and GSEs:
The unrealized losses on the Company's investment in
23
government sponsored entities ("GSEs") were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2018
.
Mortgage-backed securities:
The unrealized losses on the Company's investment in
70
GSE mortgage-backed securities were caused by interest rate increases.
Sixty
of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2018
.
Collateralized Mortgage Obligations:
The unrealized loss associated with
two
private GSE collateralized mortgage obligations ("CMOs") is due to normal market fluctuations.
One
of these securities has been in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company's investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2018
.
State and municipal securities
: The unrealized losses on
62
state and municipal securities were caused by interest rate increases and not credit deterioration. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2018
.
Corporate securities
: The unrealized loss on
one
corporate security was caused by interest rate increases and not credit deterioration. The contractual terms of the investment does not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider the investment to be other-than-temporarily impaired at
December 31, 2018
.
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company's consolidated balance sheet. The FHLB requires the Bank to maintain stock in an amount equal to
4.25%
of outstanding borrowings and a specific percentage of the Bank's total assets. The Federal Reserve Bank of Richmond requires the Bank to maintain stock with a par value equal to
3.0%
of its outstanding capital and an additional
3.0%
is on call. Restricted equity securities consist of Federal Reserve Bank of Richmond stock in the amount of
$3,621,000
and
$3,587,000
as of
December 31, 2018
and
2017
, respectively, and FHLB stock in the amount of
$1,626,000
and
$2,523,000
as of
December 31, 2018
and
2017
, respectively.
The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
Federal agencies and GSEs
|
$
|
99,133
|
|
|
$
|
2,127
|
|
|
$
|
45,474
|
|
|
$
|
321
|
|
|
$
|
53,659
|
|
|
$
|
1,806
|
|
Mortgage-backed and CMOs
|
90,806
|
|
|
1,140
|
|
|
64,449
|
|
|
533
|
|
|
26,357
|
|
|
607
|
|
State and municipal
|
34,550
|
|
|
347
|
|
|
27,442
|
|
|
159
|
|
|
7,108
|
|
|
188
|
|
Corporate
|
1,529
|
|
|
14
|
|
|
495
|
|
|
5
|
|
|
1,034
|
|
|
9
|
|
Total
|
$
|
226,018
|
|
|
$
|
3,628
|
|
|
$
|
137,860
|
|
|
$
|
1,018
|
|
|
$
|
88,158
|
|
|
$
|
2,610
|
|
Other-Than-Temporary-Impaired Securities
As of
December 31, 2018
and
2017
, there were
no
securities classified as other-than-temporary impaired.
Note 4 – Loans
Loans, excluding loans held for sale, at
December 31, 2018
and
2017
were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Commercial
|
$
|
285,972
|
|
|
$
|
251,666
|
|
Commercial real estate:
|
|
|
|
|
|
Construction and land development
|
97,240
|
|
|
123,147
|
|
Commercial real estate
|
655,800
|
|
|
637,701
|
|
Residential real estate:
|
|
|
|
|
|
Residential
|
209,438
|
|
|
209,326
|
|
Home equity
|
103,933
|
|
|
109,857
|
|
Consumer
|
5,093
|
|
|
4,428
|
|
Total loans
|
$
|
1,357,476
|
|
|
$
|
1,336,125
|
|
Net deferred loan (fees) costs included in the above loan categories are
$720,000
for
2018
and
$463,000
for
2017
.
Overdraft deposits were reclassified to consumer loans in the amount of
$127,000
and
$114,000
for
2018
and
2017
, respectively.
Acquired Loans
The outstanding principal balance and the carrying amount of these loans, including ASC 310-30 loans, included in the consolidated balance sheets at
December 31, 2018
and
2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Outstanding principal balance
|
$
|
63,619
|
|
|
$
|
79,523
|
|
Carrying amount
|
58,886
|
|
|
73,796
|
|
The outstanding principal balance and related carrying amount of purchased credit impaired loans, for which the Company applies ASC 310-30 to account for interest earned, at
December 31, 2018
and
2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Outstanding principal balance
|
$
|
24,500
|
|
|
$
|
27,876
|
|
Carrying amount
|
20,611
|
|
|
23,430
|
|
The following table presents changes in the accretable yield on purchased credit impaired loans, for which the Company applies ASC 310-30, for the years ended
December 31, 2018
,
2017
, and
2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
4,890
|
|
|
$
|
6,103
|
|
|
$
|
7,299
|
|
Accretion
|
(2,362
|
)
|
|
(3,117
|
)
|
|
(3,232
|
)
|
Reclassification from nonaccretable difference
|
956
|
|
|
1,006
|
|
|
2,197
|
|
Other changes, net
|
1,149
|
|
|
898
|
|
|
(161
|
)
|
Balance at December 31
|
$
|
4,633
|
|
|
$
|
4,890
|
|
|
$
|
6,103
|
|
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30- 59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days +
Past Due
and Still
Accruing
|
|
Non-
Accrual
Loans
|
|
Total
Past
Due
|
|
Current
|
|
Total
Loans
|
Commercial
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83
|
|
|
$
|
103
|
|
|
$
|
285,869
|
|
|
$
|
285,972
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
27
|
|
|
97,213
|
|
|
97,240
|
|
Commercial real estate
|
42
|
|
|
—
|
|
|
—
|
|
|
197
|
|
|
239
|
|
|
655,561
|
|
|
655,800
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
456
|
|
|
157
|
|
|
72
|
|
|
659
|
|
|
1,344
|
|
|
208,094
|
|
|
209,438
|
|
Home equity
|
126
|
|
|
—
|
|
|
—
|
|
|
124
|
|
|
250
|
|
|
103,683
|
|
|
103,933
|
|
Consumer
|
21
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
5,069
|
|
|
5,093
|
|
Total
|
$
|
665
|
|
|
$
|
160
|
|
|
$
|
72
|
|
|
$
|
1,090
|
|
|
$
|
1,987
|
|
|
$
|
1,355,489
|
|
|
$
|
1,357,476
|
|
The following table shows an analysis by portfolio segment of the Company's past due loans at
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30- 59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days +
Past Due
and Still
Accruing
|
|
Non-
Accrual
Loans
|
|
Total
Past
Due
|
|
Current
|
|
Total
Loans
|
Commercial
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
182
|
|
|
$
|
251,484
|
|
|
$
|
251,666
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
|
123,111
|
|
|
123,147
|
|
Commercial real estate
|
86
|
|
|
—
|
|
|
280
|
|
|
489
|
|
|
855
|
|
|
636,846
|
|
|
637,701
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
282
|
|
|
71
|
|
|
79
|
|
|
1,343
|
|
|
1,775
|
|
|
207,551
|
|
|
209,326
|
|
Home equity
|
141
|
|
|
16
|
|
|
—
|
|
|
243
|
|
|
400
|
|
|
109,457
|
|
|
109,857
|
|
Consumer
|
21
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
4,402
|
|
|
4,428
|
|
Total
|
$
|
622
|
|
|
$
|
92
|
|
|
$
|
359
|
|
|
$
|
2,201
|
|
|
$
|
3,274
|
|
|
$
|
1,332,851
|
|
|
$
|
1,336,125
|
|
Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
14
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate
|
376
|
|
|
373
|
|
|
—
|
|
|
542
|
|
|
36
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
646
|
|
|
646
|
|
|
—
|
|
|
875
|
|
|
29
|
|
Home equity
|
49
|
|
|
49
|
|
|
—
|
|
|
108
|
|
|
10
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
$
|
1,099
|
|
|
$
|
1,096
|
|
|
$
|
—
|
|
|
$
|
1,571
|
|
|
$
|
89
|
|
With a related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
62
|
|
|
$
|
58
|
|
|
$
|
55
|
|
|
$
|
354
|
|
|
$
|
40
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development*
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Commercial real estate*
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
173
|
|
|
173
|
|
|
9
|
|
|
342
|
|
|
9
|
|
Home equity*
|
—
|
|
|
—
|
|
|
—
|
|
|
128
|
|
|
1
|
|
Consumer*
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
235
|
|
|
$
|
231
|
|
|
$
|
64
|
|
|
$
|
863
|
|
|
$
|
50
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
90
|
|
|
$
|
86
|
|
|
$
|
55
|
|
|
$
|
398
|
|
|
$
|
54
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Commercial real estate
|
376
|
|
|
373
|
|
|
—
|
|
|
560
|
|
|
36
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
819
|
|
|
819
|
|
|
9
|
|
|
1,217
|
|
|
38
|
|
Home equity
|
49
|
|
|
49
|
|
|
—
|
|
|
236
|
|
|
11
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
$
|
1,334
|
|
|
$
|
1,327
|
|
|
$
|
64
|
|
|
$
|
2,434
|
|
|
$
|
139
|
|
______________________
*Allowance is reported as
zero
in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
1
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
4
|
|
Commercial real estate
|
791
|
|
|
789
|
|
|
—
|
|
|
1,069
|
|
|
66
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
717
|
|
|
719
|
|
|
—
|
|
|
575
|
|
|
41
|
|
Home equity
|
142
|
|
|
142
|
|
|
—
|
|
|
109
|
|
|
10
|
|
Consumer
|
5
|
|
|
5
|
|
|
—
|
|
|
6
|
|
|
1
|
|
|
$
|
1,659
|
|
|
$
|
1,659
|
|
|
$
|
—
|
|
|
$
|
1,834
|
|
|
$
|
123
|
|
With a related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
202
|
|
|
$
|
201
|
|
|
$
|
154
|
|
|
$
|
150
|
|
|
$
|
16
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development*
|
37
|
|
|
37
|
|
|
—
|
|
|
56
|
|
|
—
|
|
Commercial real estate*
|
34
|
|
|
32
|
|
|
—
|
|
|
126
|
|
|
11
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
1,022
|
|
|
1,022
|
|
|
12
|
|
|
1,174
|
|
|
27
|
|
Home equity
|
263
|
|
|
261
|
|
|
1
|
|
|
251
|
|
|
1
|
|
Consumer*
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
$
|
1,558
|
|
|
$
|
1,553
|
|
|
$
|
167
|
|
|
$
|
1,762
|
|
|
$
|
55
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
206
|
|
|
$
|
205
|
|
|
$
|
154
|
|
|
$
|
169
|
|
|
$
|
17
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
37
|
|
|
37
|
|
|
—
|
|
|
112
|
|
|
4
|
|
Commercial real estate
|
825
|
|
|
821
|
|
|
—
|
|
|
1,195
|
|
|
77
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
1,739
|
|
|
1,741
|
|
|
12
|
|
|
1,749
|
|
|
68
|
|
Home equity
|
405
|
|
|
403
|
|
|
1
|
|
|
360
|
|
|
11
|
|
Consumer
|
5
|
|
|
5
|
|
|
—
|
|
|
11
|
|
|
1
|
|
|
$
|
3,217
|
|
|
$
|
3,212
|
|
|
$
|
167
|
|
|
$
|
3,596
|
|
|
$
|
178
|
|
______________________
*Allowance is reported as
zero
in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs that exceed unearned fees.
The following table shows the detail of loans modified as TDRs during the year ended
December 31, 2018
,
2017
, and
2016
, included in the impaired loan balances (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Modified as TDRs for the Year Ended December 31, 2018
|
|
Number of
Contracts
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Commercial
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
Home equity
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
1
|
|
|
11
|
|
|
11
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
1
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Modified as TDRs for the Year Ended December 31, 2017
|
|
Number of
Contracts
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Commercial
|
5
|
|
|
$
|
212
|
|
|
$
|
212
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
Home equity
|
2
|
|
|
57
|
|
|
57
|
|
Residential real estate
|
1
|
|
|
36
|
|
|
36
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
8
|
|
|
$
|
305
|
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Modified as TDRs for the Year Ended December 31, 2016
|
|
Number of
Contracts
|
|
Pre-Modification
Outstanding Recorded
Investment
|
|
Post-Modification
Outstanding Recorded
Investment
|
Commercial
|
2
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Commercial real estate
|
2
|
|
|
1,005
|
|
|
1,003
|
|
Home equity
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
4
|
|
|
322
|
|
|
312
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
8
|
|
|
$
|
1,351
|
|
|
$
|
1,339
|
|
During the years ended
December 31, 2018
and
2016
, the Company had
no
loans that subsequently defaulted within twelve months of modification. During the year ended
December 31, 2017
, there were
three
commercial loans with a total recorded investment of
$109,000
and
one
residential real estate loan with a recorded investment of
$143,000
that defaulted within twelve months of modification. The Company defines default as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification. Any charge-offs resulting in default were adjusted through the allowance for loan losses.
The following table summarizes the primary reason certain loan modifications were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Rate modifications include TDRs made with below market interest rates that also include modifications of loan structures (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Type of Modification
|
|
ALLL
|
|
Type of Modification
|
|
ALLL
|
|
Type of Modification
|
|
ALLL
|
|
Rate
|
|
Structure
|
|
Impact
|
|
Rate
|
|
Structure
|
|
Impact
|
|
Rate
|
|
Structure
|
|
Impact
|
Commercial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
212
|
|
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
—
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,003
|
|
|
—
|
|
Home equity
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
312
|
|
|
1
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
1,339
|
|
|
$
|
1
|
|
The Company had
$112,000
in residential real estate loans in the process of foreclosure at
December 31, 2018
and
$719,000
and
$629,000
in residential OREO at
December 31, 2018
and
December 31, 2017
, respectively.
Risk Ratings
The following table shows the Company's loan portfolio broken down by internal risk grading as of
December 31, 2018
(dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Construction and Land Development
|
|
Commercial
Real Estate
|
|
Residential Real Estate
|
|
Home
Equity
|
Pass
|
$
|
285,092
|
|
|
$
|
93,000
|
|
|
$
|
647,519
|
|
|
$
|
204,261
|
|
|
$
|
103,541
|
|
Special Mention
|
154
|
|
|
1,840
|
|
|
4,403
|
|
|
1,685
|
|
|
—
|
|
Substandard
|
726
|
|
|
2,400
|
|
|
3,878
|
|
|
3,492
|
|
|
392
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
285,972
|
|
|
$
|
97,240
|
|
|
$
|
655,800
|
|
|
$
|
209,438
|
|
|
$
|
103,933
|
|
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
|
|
|
|
|
|
Consumer
|
Performing
|
$
|
5,093
|
|
Nonperforming
|
—
|
|
Total
|
$
|
5,093
|
|
Loans classified in the Pass category typically are fundamentally sound and risk factors are reasonable and acceptable.
Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.
Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions,
and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.
Consumer loans are classified as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due
90 days
or more, or payments are less than 90 days past due, but there are other good reasons to doubt that payment will be made in full.
The following table shows the Company's loan portfolio broken down by internal risk grading as of
December 31, 2017
(dollars in thousands):
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Construction and Land Development
|
|
Commercial
Real Estate
|
|
Residential Real Estate
|
|
Home
Equity
|
Pass
|
$
|
248,714
|
|
|
$
|
114,502
|
|
|
$
|
625,861
|
|
|
$
|
200,405
|
|
|
$
|
107,705
|
|
Special Mention
|
1,763
|
|
|
7,114
|
|
|
6,914
|
|
|
4,438
|
|
|
1,325
|
|
Substandard
|
1,189
|
|
|
1,531
|
|
|
4,926
|
|
|
4,483
|
|
|
827
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
251,666
|
|
|
$
|
123,147
|
|
|
$
|
637,701
|
|
|
$
|
209,326
|
|
|
$
|
109,857
|
|
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
|
|
|
|
|
|
Consumer
|
Performing
|
$
|
4,415
|
|
Nonperforming
|
13
|
|
Total
|
$
|
4,428
|
|
Note 5 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Changes in the allowance for loan losses and the reserve for unfunded lending commitments for each of the years in the three-year period ended
December 31, 2018
, are presented below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Allowance for Loan Losses
|
|
|
|
|
|
Balance, beginning of year
|
$
|
13,603
|
|
|
$
|
12,801
|
|
|
$
|
12,601
|
|
Provision for (recovery of) loan losses
|
(103
|
)
|
|
1,016
|
|
|
250
|
|
Charge-offs
|
(1,020
|
)
|
|
(690
|
)
|
|
(326
|
)
|
Recoveries
|
325
|
|
|
476
|
|
|
276
|
|
Balance, end of year
|
$
|
12,805
|
|
|
$
|
13,603
|
|
|
$
|
12,801
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Reserve for Unfunded Lending Commitments
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
206
|
|
|
$
|
203
|
|
|
$
|
184
|
|
Provision for unfunded commitments
|
11
|
|
|
3
|
|
|
19
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
Balance, end of year
|
$
|
217
|
|
|
$
|
206
|
|
|
$
|
203
|
|
The reserve for unfunded loan commitments is included in other liabilities, and the provision for (recovery of) unfunded commitments is included in noninterest expense. The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
Total
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
2,413
|
|
|
$
|
8,321
|
|
|
$
|
2,825
|
|
|
$
|
44
|
|
|
$
|
13,603
|
|
Charge-offs
|
(787
|
)
|
|
(11
|
)
|
|
(86
|
)
|
|
(136
|
)
|
|
(1,020
|
)
|
Recoveries
|
69
|
|
|
10
|
|
|
149
|
|
|
97
|
|
|
325
|
|
Provision
|
842
|
|
|
(1,074
|
)
|
|
89
|
|
|
40
|
|
|
(103
|
)
|
Balance at December 31, 2018
|
$
|
2,537
|
|
|
$
|
7,246
|
|
|
$
|
2,977
|
|
|
$
|
45
|
|
|
$
|
12,805
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
64
|
|
Collectively evaluated for impairment
|
2,482
|
|
|
7,211
|
|
|
2,822
|
|
|
45
|
|
|
12,560
|
|
Purchased credit impaired loans
|
—
|
|
|
35
|
|
|
146
|
|
|
—
|
|
|
181
|
|
Total
|
$
|
2,537
|
|
|
$
|
7,246
|
|
|
$
|
2,977
|
|
|
$
|
45
|
|
|
$
|
12,805
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
90
|
|
|
$
|
376
|
|
|
$
|
868
|
|
|
$
|
—
|
|
|
$
|
1,334
|
|
Collectively evaluated for impairment
|
285,431
|
|
|
742,365
|
|
|
302,657
|
|
|
5,078
|
|
|
1,335,531
|
|
Purchased credit impaired loans
|
451
|
|
|
10,299
|
|
|
9,846
|
|
|
15
|
|
|
20,611
|
|
Total
|
$
|
285,972
|
|
|
$
|
753,040
|
|
|
$
|
313,371
|
|
|
$
|
5,093
|
|
|
$
|
1,357,476
|
|
The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment for the year ended
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
Total
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
2,095
|
|
|
$
|
7,355
|
|
|
$
|
3,303
|
|
|
$
|
48
|
|
|
$
|
12,801
|
|
Charge-offs
|
(282
|
)
|
|
(93
|
)
|
|
(172
|
)
|
|
(143
|
)
|
|
(690
|
)
|
Recoveries
|
223
|
|
|
60
|
|
|
85
|
|
|
108
|
|
|
476
|
|
Provision
|
377
|
|
|
999
|
|
|
(391
|
)
|
|
31
|
|
|
1,016
|
|
Balance at December 31, 2017
|
$
|
2,413
|
|
|
$
|
8,321
|
|
|
$
|
2,825
|
|
|
$
|
44
|
|
|
$
|
13,603
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
167
|
|
Collectively evaluated for impairment
|
2,259
|
|
|
8,203
|
|
|
2,645
|
|
|
44
|
|
|
13,151
|
|
Purchased credit impaired loans
|
—
|
|
|
118
|
|
|
167
|
|
|
—
|
|
|
285
|
|
Total
|
$
|
2,413
|
|
|
$
|
8,321
|
|
|
$
|
2,825
|
|
|
$
|
44
|
|
|
$
|
13,603
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
206
|
|
|
$
|
862
|
|
|
$
|
2,144
|
|
|
$
|
5
|
|
|
$
|
3,217
|
|
Collectively evaluated for impairment
|
251,185
|
|
|
747,819
|
|
|
306,066
|
|
|
4,408
|
|
|
1,309,478
|
|
Purchased credit impaired loans
|
275
|
|
|
12,167
|
|
|
10,973
|
|
|
15
|
|
|
23,430
|
|
Total
|
$
|
251,666
|
|
|
$
|
760,848
|
|
|
$
|
319,183
|
|
|
$
|
4,428
|
|
|
$
|
1,336,125
|
|
The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, portfolio analysis of smaller balance, homogenous loans, and qualitative factors. Qualitative factors include trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans, effects of changes in risk selection, underwriting standards, and lending policies; experience of lending officers, other lending staff and loan review; national, regional, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit.
Note 6 – Premises and Equipment
Major classifications of premises and equipment at
December 31, 2018
and
2017
are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Land
|
$
|
6,509
|
|
|
$
|
6,583
|
|
Buildings
|
28,075
|
|
|
26,713
|
|
Leasehold improvements
|
1,011
|
|
|
981
|
|
Furniture and equipment
|
17,521
|
|
|
17,677
|
|
|
53,116
|
|
|
51,954
|
|
Accumulated depreciation
|
(26,441
|
)
|
|
(26,053
|
)
|
Premises and equipment, net
|
$
|
26,675
|
|
|
$
|
25,901
|
|
Depreciation expense for the years ended
December 31, 2018
,
2017
, and
2016
was
$1,775,000
,
$1,877,000
, and
$1,892,000
, respectively.
The Company has entered into operating leases for several of its branch and ATM facilities. The minimum annual rental payments under these leases at
December 31, 2018
are as follows (dollars in thousands):
|
|
|
|
|
|
Minimum Lease
|
Year
|
Payments
|
2019
|
$
|
883
|
|
2020
|
747
|
|
2021
|
734
|
|
2022
|
708
|
|
2023
|
583
|
|
2024 and after
|
1,888
|
|
|
$
|
5,543
|
|
Lease expense, a component of occupancy and equipment expense, for the years ended
December 31, 2018
,
2017
, and
2016
was
$919,000
,
$961,000
, and
$897,000
, respectively.
Note 7 – Goodwill and Other Intangible Assets
The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Impairment testing is performed annually, as well as when an event triggering impairment may have occurred. The Company performs its annual analysis as of June 30 each fiscal year. Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. No indicators of impairment were identified during the years ended
December 31, 2018
,
2017
, or
2016
.
Core deposit intangibles resulting from the MidCarolina acquisition in July 2011 were
$6,556,000
and are being amortized on an accelerated basis over
108 months
. Core deposit intangibles resulting from the MainStreet acquisition were
$1,839,000
and are being amortized on an accelerated basis over
120 months
.
The changes in the carrying amount of goodwill and intangibles for the twelve months ended
December 31, 2018
, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Intangibles
|
Balance at December 31, 2017
|
$
|
43,872
|
|
|
$
|
1,191
|
|
Amortization
|
—
|
|
|
(265
|
)
|
Balance at December 31, 2018
|
$
|
43,872
|
|
|
$
|
926
|
|
Goodwill and intangible assets at
December 31, 2018
and
2017
are as follow (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
December 31, 2018
|
|
|
|
|
|
Core deposit intangibles
|
$
|
11,508
|
|
|
$
|
(10,582
|
)
|
|
$
|
926
|
|
Goodwill
|
43,872
|
|
|
—
|
|
|
43,872
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
$
|
11,508
|
|
|
$
|
(10,317
|
)
|
|
$
|
1,191
|
|
Goodwill
|
43,872
|
|
|
—
|
|
|
43,872
|
|
Amortization expense of core deposit intangibles for the years ended
December 31, 2018
,
2017
, and
2016
was
$265,000
,
$528,000
, and
$964,000
, respectively. As of
December 31, 2018
, the estimated future amortization expense of core deposit intangibles is as follows (dollars in thousands):
|
|
|
|
|
Year
|
Amount
|
2019
|
$
|
219
|
|
2020
|
207
|
|
2021
|
197
|
|
2022
|
155
|
|
2023
|
127
|
|
2024 and after
|
21
|
|
Total
|
$
|
926
|
|
Note 8 - Deposits
The aggregate amount of time deposits in denominations of $250,000 or more at
December 31, 2018
and
2017
was
$159,996,000
and
$162,781,000
, respectively.
At
December 31, 2018
, the scheduled maturities and amounts of certificates of deposits (included in "time" deposits on the consolidated balance sheet) were as follows (dollars in thousands):
|
|
|
|
|
Year
|
Amount
|
2019
|
$
|
140,563
|
|
2020
|
45,811
|
|
2021
|
88,107
|
|
2022
|
44,944
|
|
2023
|
38,260
|
|
2024 and after
|
4,272
|
|
Total
|
$
|
361,957
|
|
There were
no
brokered time deposits at
December 31, 2018
or
December 31, 2017
. Time deposits through the Certificate of Deposit Account Registry Service ("CDARS") program totaled
$22,431,000
at
December 31, 2018
compared to
$25,838,000
at
December 31, 2017
. Deposits through the CDARS program are generated from major customers with substantial relationships to the Bank.
Note 9 – Short-term Borrowings
Short-term borrowings consist of customer repurchase agreements and overnight borrowings from the FHLB. The Company has federal funds lines of credit established with
two
correspondent banks in the amounts of
$15,000,000
each, and, additionally, has access to the Federal Reserve Bank of Richmond's discount window. Customer repurchase agreements are collateralized by securities of the U.S. Government, its agencies or GSEs. They mature daily. The interest rates are generally fixed but may be changed at the discretion of the Company. The securities underlying these agreements remain under the Company's control. FHLB overnight borrowings contain floating interest rates that may change daily at the discretion of the FHLB. Short-term borrowings consisted solely of the following at
December 31, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
Customer repurchase agreements
|
$
|
35,243
|
|
|
1.67
|
%
|
|
$
|
10,726
|
|
|
0.01
|
%
|
FHLB borrowings
|
—
|
|
|
—
|
%
|
|
24,000
|
|
|
1.59
|
%
|
Total short-term borrowings
|
$
|
35,243
|
|
|
|
|
$
|
34,726
|
|
|
|
Note 10 – Long-term Borrowings
Under the terms of its collateral agreement with the FHLB, the Company provides a blanket lien covering all of its residential first mortgage loans, second mortgage loans, home equity lines of credit, and commercial real estate loans. In addition, the Company pledges as collateral its capital stock in the FHLB and deposits with the FHLB. The Company has a line of credit with the FHLB equal to
30%
of the Company's assets, subject to the amount of collateral pledged. As of
December 31, 2018
,
$558,231,000
in eligible collateral was pledged under the blanket floating lien agreement which covers both short-term and long-term borrowings.
There were
no
long-term borrowings as of
December 31, 2018
or
2017
.
In the regular course of conducting its business, the Company takes deposits from political subdivisions of the states of Virginia and North Carolina. At
December 31, 2018
, the Bank's public deposits totaled
$258,566,000
. The Company is required to provide collateral to secure the deposits that exceed the insurance coverage provided by the Federal Deposit Insurance Corporation. This collateral can be provided in the form of certain types of government or agency bonds or letters of credit from the FHLB. At
December 31, 2018
, the Company had
$190,000,000
in letters of credit with the FHLB outstanding as well as
$93,073,000
in agency, state, and municipal securities to provide collateral for such deposits.
Note 11 – Junior Subordinated Debt
On April 7, 2006, AMNB Statutory Trust I, a Delaware statutory trust and a wholly owned subsidiary of the Company, issued
$20,000,000
of preferred securities in a private placement pursuant to an applicable exemption from registration. The Trust Preferred Securities mature on
June 30, 2036
, but may be redeemed at the Company's option beginning on September 30, 2011. Initially, the securities required quarterly distributions by the trust to the holder of the Trust Preferred Securities at a fixed rate of
6.66%
. Effective September 30, 2011, the rate resets quarterly at the
three-month LIBOR
plus
1.35%
. Distributions are cumulative and will accrue from the date of original issuance, but may be deferred by the Company from time to time for up to
20
consecutive quarterly periods. The Company has guaranteed the payment of all required distributions on the Trust Preferred Securities. The proceeds of the Trust Preferred Securities received by the trust, along with proceeds of
$619,000
received by the trust from the issuance of common securities by the trust to the Company, were used to purchase
$20,619,000
of the Company's junior subordinated debt securities (the "Trust Preferred Capital Notes"), issued pursuant to a junior subordinated debenture entered into between the Company and Wilmington Trust Company, as trustee. The proceeds of the Trust Preferred Securities were used to fund the cash portion of the merger consideration to the former shareholders of Community First in connection with the Company's acquisition of that company, and for general corporate purposes.
On July 1, 2011, in connection with the MidCarolina merger, the Company assumed
$8,764,000
in junior subordinated debentures to the MidCarolina Trusts, to fully and unconditionally guarantee the preferred securities issued by the MidCarolina Trusts. These long-term obligations, which currently qualify as Tier 1 capital, constitute a full and unconditional guarantee by the Company of the MidCarolina Trusts' obligations. The MidCarolina Trusts are not consolidated in the Company's financial statements.
In accordance with ASC 810-10-15-14,
Consolidation - Overall - Scope and Scope Exceptions
, the Company did not eliminate through consolidation the Company's
$619,000
equity investment in AMNB Statutory Trust I or the
$264,000
equity investment in the MidCarolina Trusts. Instead, the Company reflected this equity investment in the "Accrued interest receivable and other assets" line item in the consolidated balance sheets.
A description of the junior subordinated debt securities outstanding payable to the trusts is shown below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
|
|
|
|
|
|
|
As of December 31,
|
Issuing Entity
|
|
Date
Issued
|
|
Interest
Rate
|
|
Maturity
Date
|
|
2018
|
|
2017
|
AMNB Trust I
|
|
4/7/2006
|
|
Libor plus 1.35%
|
|
6/30/2036
|
|
$
|
20,619
|
|
|
$
|
20,619
|
|
|
|
|
|
|
|
|
|
|
|
|
MidCarolina Trust I
|
|
10/29/2002
|
|
Libor plus 3.45%
|
|
11/7/2032
|
|
4,377
|
|
|
4,322
|
|
|
|
|
|
|
|
|
|
|
|
|
MidCarolina Trust II
|
|
12/3/2003
|
|
Libor plus 2.95%
|
|
10/7/2033
|
|
2,931
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,927
|
|
|
$
|
27,826
|
|
The principal amounts reflected for the MidCarolina Trusts as of
December 31, 2018
and
2017
, are net of fair value marks of
$778,000
and
$678,000
, respectively. The original fair value marks of
$1,197,000
and
$1,021,000
were recorded as a result
of the merger with MidCarolina on July 1, 2011 and are being amortized into interest expense over the remaining lives of the respective borrowings.
Note 12 - Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments ("derivatives") primarily to manage risks associated with changing interest rates. The Company's derivatives are hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Company's trust preferred capital notes. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments, with such interest rates set based on benchmarked interest rates.
All interest rate swaps were entered into with counterparties 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 these derivative contracts is not significant.
Terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis. In accordance with ASC 815,
Derivatives and Hedging
, the effective portions of the derivatives' unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company's assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in the Company's consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2018
|
|
Notional Amount
|
|
Positions
|
|
Assets
|
|
Liabilities
|
|
Cash Collateral Pledged
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
Variable-rate to fixed-rate swaps with counterparty
|
$
|
28,500
|
|
|
3
|
|
|
$
|
—
|
|
|
$
|
804
|
|
|
$
|
650
|
|
Note 13 – Stock-Based Compensation
The Company's 2018 Stock Incentive Plan (the "2018 Plan") was adopted by the Board of Directors of the Company on February 20, 2018 and approved by shareholders on May 15, 2018 at the Company's 2018 Annual Meeting of Shareholders.
The 2018 Plan provides for the granting of restricted stock awards, incentive and non-statutory options, and other equity-based awards to employees and directors at the discretion of the Compensation Committee of the Board of Directors. The 2018 Plan authorizes the issuance of up to
675,000
shares of common stock. The 2018 Plan replaced the Company's stock incentive plan that was approved by the shareholders at the 2008 Annual Meeting that expired in February 2018 (the "2008 Plan").
Stock Options
Accounting guidance requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued.
A summary of stock option transactions for the year ended
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
($000)
|
Outstanding at December 31, 2017
|
50,985
|
|
|
$
|
24.09
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(35,310
|
)
|
|
24.37
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
(2,475
|
)
|
|
31.31
|
|
|
|
|
|
Outstanding at December 31, 2018
|
13,200
|
|
|
$
|
21.97
|
|
|
0.05 years
|
|
$
|
97
|
|
Exercisable at December 31, 2018
|
13,200
|
|
|
$
|
21.97
|
|
|
0.05 years
|
|
$
|
97
|
|
The aggregate intrinsic value of stock options in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on
December 31, 2018
. This amount changes based on changes in the fair value of the Company's common stock.
The total proceeds of the in-the-money options exercised during the years ended
December 31, 2018
,
2017
, and
2016
were
$861,000
,
$113,000
, and
$142,000
, respectively. Total intrinsic value of options exercised during the years ended
December 31, 2018
,
2017
, and
2016
was
$732,000
,
$287,000
, and
$11,000
, respectively.
As of
December 31, 2018
,
2017
, and
2016
, there was
no
recognized or unrecognized compensation expense attributable to the outstanding stock options.
The following table summarizes information related to stock options outstanding on
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
Range of
Exercise Prices
|
|
Number of
Outstanding
Options
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Weighted-Average
Exercise Price
|
$20.00 to $25.00
|
|
13,200
|
|
|
0.05 years
|
|
$
|
21.97
|
|
No stock options were granted in
2018
,
2017
and
2016
.
Restricted Stock
The Company from time-to-time grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's common stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. Restricted stock granted in
2018
cliff vests at the end of a
36
-month period beginning on the date of grant. Nonvested restricted stock activity for the year ended
December 31, 2018
is summarized in the following table:
|
|
|
|
|
|
|
|
Restricted Stock
|
Shares
|
|
Weighted
Average Grant
Date Value
|
Nonvested at December 31, 2017
|
46,501
|
|
|
$
|
26.28
|
|
Granted
|
19,492
|
|
|
39.38
|
|
Vested
|
(12,712
|
)
|
|
23.50
|
|
Forfeited
|
(483
|
)
|
|
34.70
|
|
Nonvested at December 31, 2018
|
52,798
|
|
|
31.71
|
|
As of
December 31, 2018
,
2017
, and
2016
, there was
$647,000
,
$538,000
, and
$568,000
, respectively, in unrecognized compensation cost related to nonvested restricted stock granted under the 2008 Plan and the 2018 Plan. This cost is expected to be recognized over the next
12
to
36 months
. The share based compensation expense for nonvested restricted stock was
$610,000
,
$532,000
, and
$444,000
during
2018
,
2017
, and
2016
, respectively.
Starting in 2010, the Company began offering its outside directors alternatives with respect to director compensation. The regular monthly board retainer can be received quarterly in the form of immediately vested, but restricted stock, with a market value of
$7,500
. Monthly meeting fees can be received as
$725
per meeting in cash or
$900
in immediately vested, but restricted stock. For
2018
,
12
of the
13
outside directors elected to receive stock in lieu of cash for either all of part of their retainer or meeting fees. Only outside directors receive board fees. The Company issued
15,471
,
13,093
and
13,166
shares and recognized share based compensation expense of
$586,000
,
$484,000
, and
$380,000
during
2018
,
2017
and
2016
, respectively.
Note 14 – Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to 2015.
The components of the Company's net deferred tax assets (liabilities) were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
2,868
|
|
|
$
|
3,047
|
|
Nonaccrual loan interest
|
460
|
|
|
444
|
|
Other real estate owned valuation allowance
|
69
|
|
|
150
|
|
Deferred compensation
|
832
|
|
|
835
|
|
Net unrealized losses on securities
|
1,147
|
|
|
226
|
|
Acquisition accounting adjustments
|
734
|
|
|
934
|
|
Accrued pension liability
|
36
|
|
|
170
|
|
Other
|
420
|
|
|
488
|
|
Total deferred tax assets
|
6,566
|
|
|
6,294
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
759
|
|
|
761
|
|
Accretion of discounts on securities
|
24
|
|
|
24
|
|
Core deposit intangibles
|
208
|
|
|
267
|
|
Other
|
238
|
|
|
201
|
|
Total deferred tax liabilities
|
1,229
|
|
|
1,253
|
|
Net deferred tax assets
|
$
|
5,337
|
|
|
$
|
5,041
|
|
The provision for income taxes consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current tax expense
|
$
|
5,090
|
|
|
$
|
7,355
|
|
|
$
|
6,125
|
|
Deferred tax expense
|
556
|
|
|
724
|
|
|
882
|
|
Deferred tax asset adjustment for tax rate change
|
—
|
|
|
2,747
|
|
|
—
|
|
Total income tax expense
|
$
|
5,646
|
|
|
$
|
10,826
|
|
|
$
|
7,007
|
|
A reconcilement of the "expected" Federal income tax expense to reported income tax expense is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected federal tax expense
|
$
|
5,927
|
|
|
$
|
9,126
|
|
|
$
|
8,158
|
|
Tax impact from enacted change in tax rate
|
—
|
|
|
2,747
|
|
|
—
|
|
Nondeductible interest expense
|
69
|
|
|
85
|
|
|
94
|
|
Tax-exempt interest
|
(504
|
)
|
|
(949
|
)
|
|
(1,265
|
)
|
State income taxes
|
337
|
|
|
296
|
|
|
296
|
|
Other, net
|
(183
|
)
|
|
(479
|
)
|
|
(276
|
)
|
Total income tax expense
|
$
|
5,646
|
|
|
$
|
10,826
|
|
|
$
|
7,007
|
|
Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of
$2,747,000
, recorded as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017 (the "Tax Reform Act"). The Tax Reform Act reduced the corporate federal tax rate from 35% to 21% effective January 1, 2018.
Note 15 – Earnings Per Common Share
The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of potentially dilutive common stock. Potentially dilutive common stock had no effect on income available to common shareholders. Nonvested restricted shares are included in the computation of basic earnings per share as the holder is entitled to full shareholder benefits during the vesting period including voting rights and sharing in nonforfeitable dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Shares
|
|
Per Share
Amount
|
|
Shares
|
|
Per Share
Amount
|
|
Shares
|
|
Per Share
Amount
|
Basic earnings per share
|
8,698,014
|
|
|
$
|
2.60
|
|
|
8,641,717
|
|
|
$
|
1.76
|
|
|
8,611,507
|
|
|
$
|
1.89
|
|
Effect of dilutive securities - stock options
|
10,448
|
|
|
(0.01
|
)
|
|
18,911
|
|
|
—
|
|
|
9,734
|
|
|
—
|
|
Diluted earnings per share
|
8,708,462
|
|
|
$
|
2.59
|
|
|
8,660,628
|
|
|
$
|
1.76
|
|
|
8,621,241
|
|
|
$
|
1.89
|
|
Outstanding stock options on common stock which were not included in computing diluted earnings per share in
2018
,
2017
, and
2016
because their effects were anti-dilutive, were
zero
shares,
330
shares, and
11,397
shares, respectively.
Note 16 – Off-Balance Sheet Activities
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if applicable, is based on management's credit evaluation of the customer.
The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments whose contract amounts represent credit risk were outstanding at
December 31, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Commitments to extend credit
|
$
|
362,586
|
|
|
$
|
341,760
|
|
Standby letters of credit
|
15,555
|
|
|
13,647
|
|
Mortgage loan rate lock commitments
|
9,710
|
|
|
5,089
|
|
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. These commitments generally consist of unused portions of lines of credit issued to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
At
December 31, 2018
, the Company had locked-rate commitments to originate mortgage loans amounting to approximately
$9,710,000
and loans held for sale of
$640,000
. Risks arise from the possible inability of counterparties to meet the terms of their contracts, though the Company has never experienced a failure of one of its counterparties to perform. If a loan becomes past due
90 days
within
180 days
of sale, the Company would be required to repurchase the loan.
Note 17 – Related Party Transactions
In the ordinary course of business, loans are granted to executive officers, directors, and their related entities. Management believes that all such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to similar, unrelated borrowers, and do not involve more than a normal risk of collectibility or present other unfavorable features. As of
December 31, 2018
and
2017
, none of these loans was restructured, past due, or on nonaccrual status.
An analysis of these loans for
2018
is as follows (dollars in thousands):
|
|
|
|
|
Balance at December 31, 2017
|
$
|
14,221
|
|
Additions
|
16,058
|
|
Repayments
|
(12,205
|
)
|
Balance at December 31, 2018
|
$
|
18,074
|
|
Related party deposits totaled
$18,280,000
at
December 31, 2018
and
$22,077,000
at
December 31, 2017
.
Note 18 – Employee Benefit Plans
Defined Benefit Plan
The Company previously maintained a non-contributory defined benefit pension plan which covered substantially all employees who were
21 years
of age or older and who had at least
one year
of service. The Company froze its pension plan to new participants and converted its pension plan to a cash balance plan effective December 31, 2009. Each year, existing participants will receive, with some adjustments, income based on the yield of the 10 year U.S. Treasury Note in December of the preceding year. Information pertaining to the activity in the plan is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Change in Benefit Obligation:
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
8,313
|
|
|
$
|
7,932
|
|
|
$
|
8,453
|
|
Service cost
|
—
|
|
|
—
|
|
|
—
|
|
Interest cost
|
235
|
|
|
237
|
|
|
269
|
|
Actuarial (gain) loss
|
(782
|
)
|
|
611
|
|
|
352
|
|
Settlement gain
|
(120
|
)
|
|
(3
|
)
|
|
(51
|
)
|
Benefits paid
|
(1,834
|
)
|
|
(464
|
)
|
|
(1,091
|
)
|
Projected benefit obligation at end of year
|
5,812
|
|
|
8,313
|
|
|
7,932
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
7,556
|
|
|
7,647
|
|
|
8,428
|
|
Actual return (loss) on plan assets
|
(69
|
)
|
|
373
|
|
|
310
|
|
Benefits paid
|
(1,834
|
)
|
|
(464
|
)
|
|
(1,091
|
)
|
Fair value of plan assets at end of year
|
5,653
|
|
|
7,556
|
|
|
7,647
|
|
|
|
|
|
|
|
Funded Status at End of Year
|
$
|
(159
|
)
|
|
$
|
(757
|
)
|
|
$
|
(285
|
)
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
Other liabilities
|
$
|
(159
|
)
|
|
$
|
(757
|
)
|
|
$
|
(285
|
)
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
1,594
|
|
|
$
|
2,886
|
|
|
$
|
2,652
|
|
Deferred income taxes
|
(357
|
)
|
|
(606
|
)
|
|
(928
|
)
|
Amount recognized
|
$
|
1,237
|
|
|
$
|
2,280
|
|
|
$
|
1,724
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
235
|
|
|
237
|
|
|
269
|
|
Expected return on plan assets
|
(353
|
)
|
|
(353
|
)
|
|
(385
|
)
|
Recognized net loss due to settlement
|
540
|
|
|
135
|
|
|
315
|
|
Recognized net actuarial loss
|
272
|
|
|
218
|
|
|
228
|
|
Net periodic benefit cost
|
$
|
694
|
|
|
$
|
237
|
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
(1,291
|
)
|
|
$
|
234
|
|
|
$
|
(166
|
)
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive (income) loss
|
$
|
(1,291
|
)
|
|
$
|
234
|
|
|
$
|
(166
|
)
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive (Income) Loss
|
$
|
(597
|
)
|
|
$
|
471
|
|
|
$
|
261
|
|
The accumulated benefit obligation as of
December 31, 2018
,
2017
, and
2016
was
$5,812,000
,
$8,313,000
, and
$7,932,000
, respectively. The rate of compensation increase is no longer applicable since the defined benefit plan was frozen and converted to a cash balance plan.
The plan sponsor selected the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary. This rate was intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period in which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Below is a description of the plan's assets. The plan's weighted-average asset allocations by asset category are as follows as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
Asset Category
|
December 31,
|
|
2018
|
|
2017
|
Fixed Income
|
68.0
|
%
|
|
61.7
|
%
|
Equity
|
25.2
|
%
|
|
29.5
|
%
|
Cash and Accrued Income
|
6.8
|
%
|
|
8.8
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
The investment policy and strategy for plan assets can best be described as a growth and income strategy. Diversification is accomplished by limiting the holding of any one equity issuer to no more than
5%
of total equities. Exchange traded funds are used to provide diversified exposure to the small capitalization and international equity markets. All fixed income investments are rated as investment grade, with the majority of these assets invested in corporate issues. The assets are managed by the Company's Trust and Investment Services Division. No derivatives are used to manage the assets. Equity securities do not include holdings in the Company.
The fair value of the Company's pension plan assets at
December 31, 2018
and
2017
, by asset category are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 using
|
|
Balance at December 31,
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Asset Category
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
$
|
359
|
|
|
$
|
359
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored entities
|
2,119
|
|
|
—
|
|
|
2,119
|
|
|
—
|
|
Municipal bonds and notes
|
1,513
|
|
|
—
|
|
|
1,513
|
|
|
—
|
|
Corporate bonds and notes
|
237
|
|
|
—
|
|
|
237
|
|
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
1,227
|
|
|
1,227
|
|
|
—
|
|
|
—
|
|
Foreign companies
|
198
|
|
|
198
|
|
|
—
|
|
|
—
|
|
|
$
|
5,653
|
|
|
$
|
1,784
|
|
|
$
|
3,869
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 using
|
|
Balance at December 31,
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Asset Category
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash
|
$
|
617
|
|
|
$
|
617
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored entities
|
1,892
|
|
|
—
|
|
|
1,892
|
|
|
—
|
|
Municipal bonds and notes
|
1,931
|
|
|
—
|
|
|
1,931
|
|
|
—
|
|
Corporate bonds and notes
|
880
|
|
|
—
|
|
|
880
|
|
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
1,768
|
|
|
1,768
|
|
|
—
|
|
|
—
|
|
Foreign companies
|
468
|
|
|
468
|
|
|
—
|
|
|
—
|
|
|
$
|
7,556
|
|
|
$
|
2,853
|
|
|
$
|
4,703
|
|
|
$
|
—
|
|
Projected benefit payments for the years
2019
to 2028 are as follows (dollars in thousands):
|
|
|
|
|
Year
|
Amount
|
2019
|
$
|
844
|
|
2020
|
436
|
|
2021
|
639
|
|
2022
|
587
|
|
2023
|
1,018
|
|
2024-2028
|
2,486
|
|
401(k) Plan
The Company maintains a 401(k) plan that covers substantially all full-time employees of the Company. The Company matches a portion of the contribution made by employee participants after at least
one year
of service. The Company contributed
$778,000
,
$763,000
, and
$623,000
to the 401(k) plan in
2018
,
2017
, and
2016
, respectively. These amounts are included in employee benefits expense for the respective years.
Deferred Compensation Arrangements
The Company has historically maintained deferred compensation agreements with certain current and former employees providing for annual payments to each ranging from
$25,000
to
$50,000
per year for
ten years
upon their retirement. The liabilities under these agreements are being accrued over the officers' remaining periods of employment so that, on the date of their retirement, the then-present value of the annual payments would have been accrued. As of
December 31, 2018
, the Company only had
one
remaining agreement under which payments are being made to a former officer. The liabilities were
$300,000
and
$350,000
at
December 31, 2018
and
2017
, respectively. The expense for these agreements was $
0
, $
3,000
, and $
6,000
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Incentive Arrangements
The Company maintains a cash incentive compensation plan for officers based on the Company's performance and individual officer goals. The total amount charged to salary expense for this plan was
$1,784,000
, $
1,243,000
, and $
916,000
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Note 19 – Fair Value Measurements
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of FASB ASC 825,
Financial Instruments
, the fair value of a financial instrument is the price that would be received to sell 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 at the measurement date. Fair value is best determined based upon quoted market prices. However,
in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured 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.
|
|
|
Level 1 –
|
Valuation is based on quoted prices in active markets for identical assets and liabilities.
|
Level 2 –
|
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
|
Level 3 –
|
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
|
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale and equity securities
: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).
Derivative asset (liability) - cash flow hedges
: Cash flow hedges are recorded at fair value on a recurring basis. Cash flow hedges are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. All of the Company's cash flow hedges are classified as Level 2.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis during the period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 Using
|
|
Balance as of December 31,
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable Inputs
|
Description
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
$
|
134,039
|
|
|
$
|
—
|
|
|
$
|
134,039
|
|
|
$
|
—
|
|
Mortgage-backed and CMOs
|
111,867
|
|
|
—
|
|
|
111,867
|
|
|
—
|
|
State and municipal
|
79,902
|
|
|
—
|
|
|
79,902
|
|
|
—
|
|
Corporate
|
6,845
|
|
|
—
|
|
|
6,845
|
|
|
—
|
|
Total securities available for sale
|
$
|
332,653
|
|
|
$
|
—
|
|
|
$
|
332,653
|
|
|
$
|
—
|
|
Equity securities
|
$
|
1,830
|
|
|
$
|
—
|
|
|
$
|
1,830
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative - cash flow hedges
|
$
|
804
|
|
|
$
|
—
|
|
|
$
|
804
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
Balance as of December 31,
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Description
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
Federal agencies and GSEs
|
$
|
112,127
|
|
|
$
|
—
|
|
|
$
|
112,127
|
|
|
$
|
—
|
|
Mortgage-backed and CMOs
|
105,316
|
|
|
—
|
|
|
105,316
|
|
|
—
|
|
State and municipal
|
93,626
|
|
|
—
|
|
|
93,626
|
|
|
—
|
|
Corporate
|
8,062
|
|
|
—
|
|
|
8,062
|
|
|
—
|
|
Equity Securities
|
2,206
|
|
|
—
|
|
|
2,206
|
|
|
—
|
|
Total securities available for sale
|
$
|
321,337
|
|
|
$
|
—
|
|
|
$
|
321,337
|
|
|
$
|
—
|
|
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans held for sale
: Loans held for sale are carried at fair value. These loans currently consist of
one
-to-
four
family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis.
No
nonrecurring fair value adjustments were recorded on loans held for sale during the years ended
December 31, 2018
and
2017
. Gains and losses on the sale of loans are recorded within mortgage banking income on the consolidated statements of income.
Impaired loans
: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
Other real estate owned
: Measurement for fair values for other real estate owned are the same as impaired loans. Any fair value adjustments are recorded in the period incurred as a valuation allowance against OREO with the associated expense included in OREO expense, net on the consolidated statements of income.
The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis during the period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 Using
|
|
Balance as of December 31,
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Description
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Loans held for sale
|
$
|
640
|
|
|
$
|
—
|
|
|
$
|
640
|
|
|
$
|
—
|
|
Impaired loans, net of valuation allowance
|
171
|
|
|
—
|
|
|
—
|
|
|
171
|
|
Other real estate owned, net
|
869
|
|
|
—
|
|
|
—
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
Balance as of December 31,
|
|
Quoted Prices in
Active Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Description
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Loans held for sale
|
$
|
1,639
|
|
|
$
|
—
|
|
|
$
|
1,639
|
|
|
$
|
—
|
|
Impaired loans, net of valuation allowance
|
1,391
|
|
|
—
|
|
|
—
|
|
|
1,391
|
|
Other real estate owned, net
|
1,225
|
|
|
—
|
|
|
—
|
|
|
1,225
|
|
Quantitative Information About Level 3 Fair Value Measurements as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
Assets
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Rate
|
|
|
|
|
|
|
|
Impaired loans
|
|
Discounted appraised value
|
|
Selling cost
|
|
8.00%
|
Impaired loans
|
|
Discounted cash flow analysis
|
|
Market rate for borrower (discount rate)
|
|
3.25% - 9.80%
|
|
|
|
|
|
|
|
Other real estate owned
|
|
Discounted appraised value
|
|
Selling cost
|
|
8.00%
|
FASB ASC 825,
Financial Instruments
, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. 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 ASU 2016-01, which the Company adopted January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The carrying values and estimated fair values of the Company's financial instruments at
December 31, 2018
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 Using
|
|
Carrying Value
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Fair Value
Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
64,255
|
|
|
$
|
64,255
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,255
|
|
Equity securities
|
1,830
|
|
|
—
|
|
|
1,830
|
|
|
—
|
|
|
1,830
|
|
Securities available for sale
|
332,653
|
|
|
—
|
|
|
332,653
|
|
|
—
|
|
|
332,653
|
|
Restricted stock
|
5,247
|
|
|
—
|
|
|
5,247
|
|
|
—
|
|
|
5,247
|
|
Loans held for sale
|
640
|
|
|
—
|
|
|
640
|
|
|
—
|
|
|
640
|
|
Loans, net of allowance
|
1,344,671
|
|
|
—
|
|
|
—
|
|
|
1,334,236
|
|
|
1,334,236
|
|
Bank owned life insurance
|
18,941
|
|
|
—
|
|
|
18,941
|
|
|
—
|
|
|
18,941
|
|
Accrued interest receivable
|
5,449
|
|
|
—
|
|
|
5,449
|
|
|
—
|
|
|
5,449
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,566,227
|
|
|
$
|
—
|
|
|
$
|
1,570,721
|
|
|
$
|
—
|
|
|
$
|
1,570,721
|
|
Repurchase agreements
|
35,243
|
|
|
—
|
|
|
35,243
|
|
|
—
|
|
|
35,243
|
|
Junior subordinated debt
|
27,927
|
|
|
—
|
|
|
—
|
|
|
22,577
|
|
|
22,577
|
|
Accrued interest payable
|
795
|
|
|
—
|
|
|
795
|
|
|
—
|
|
|
795
|
|
Derivative - cash flow hedges
|
804
|
|
|
—
|
|
|
804
|
|
|
—
|
|
|
804
|
|
The carrying values and estimated fair values of the Company's financial instruments at
December 31, 2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
Carrying Value
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Fair Value
Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
52,477
|
|
|
$
|
52,477
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,477
|
|
Securities available for sale
|
321,337
|
|
|
—
|
|
|
321,337
|
|
|
—
|
|
|
321,337
|
|
Restricted stock
|
6,110
|
|
|
—
|
|
|
6,110
|
|
|
—
|
|
|
6,110
|
|
Loans held for sale
|
1,639
|
|
|
—
|
|
|
1,639
|
|
|
—
|
|
|
1,639
|
|
Loans, net of allowance
|
1,322,522
|
|
|
—
|
|
|
—
|
|
|
1,317,737
|
|
|
1,317,737
|
|
Bank owned life insurance
|
18,460
|
|
|
—
|
|
|
18,460
|
|
|
—
|
|
|
18,460
|
|
Accrued interest receivable
|
5,231
|
|
|
—
|
|
|
5,231
|
|
|
—
|
|
|
5,231
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,534,726
|
|
|
$
|
—
|
|
|
$
|
1,527,956
|
|
|
$
|
—
|
|
|
$
|
1,527,956
|
|
Repurchase agreements
|
10,726
|
|
|
—
|
|
|
10,726
|
|
|
—
|
|
|
10,726
|
|
Other short-term borrowings
|
20,000
|
|
|
—
|
|
|
20,000
|
|
|
—
|
|
|
20,000
|
|
Junior subordinated debt
|
27,826
|
|
|
—
|
|
|
—
|
|
|
28,358
|
|
|
28,358
|
|
Accrued interest payable
|
674
|
|
|
—
|
|
|
674
|
|
|
—
|
|
|
674
|
|
Note 20 – Dividend Restrictions and Regulatory Capital
The approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's retained net income, as defined, for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can distribute as dividends to the Company, without the approval of the Office of the Comptroller of the Currency,
$24,374,000
as of
December 31, 2018
. Dividends paid by the Bank to the Company are the only significant source of funding for dividends paid by the Company to its shareholders.
Federal bank regulators have issued substantially similar guidelines requiring banks and bank holding companies to maintain capital at certain levels. In addition, regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company’s financial condition and results of operations.
The Federal Reserve and Office of the Comptroller of the Currency have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Basel III Capital Rules"). The Basel III Capital Rules require banks and bank holding companies to comply with certain minimum capital ratios, plus a "capital conservation buffer," as set forth in the table below. The capital conservation buffer requirement was phased in beginning on January 1, 2016, at 0.625% of risk-weighted assets, and increased by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and is applicable to all ratios except the leverage capital ratio.
The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement (the "SBHC Policy Statement"). Under the SBHC Policy Statement, qualifying bank holding companies, such as the Company, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. However, the Company does not currently intend to issue a material amount of debt or take any other action that would cause its capital ratios to fall below the minimum ratios required by the Basel III Capital Rules. The SBHC Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules. The Bank must also comply with the capital requirements set forth in the "prompt corrective action" regulations pursuant to Section 38 of the Federal Deposit Insurance Act. The minimum capital ratios to be considered "well capitalized" are set forth in the table below.
Management believes that as of
December 31, 2018
, the Company and Bank meet all capital adequacy requirements to which they are subject. At year-end
2018
and
2017
, the most recent regulatory notifications categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category.
Actual and required capital amounts (in thousands) and ratios are presented below at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required for Capital Adequacy Purposes*
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$
|
183,579
|
|
|
12.55
|
%
|
|
$
|
65,843
|
|
|
>4.50
|
%
|
|
|
|
|
Bank
|
198,991
|
|
|
13.68
|
|
|
92,740
|
|
|
>6.375
|
|
|
$
|
94,559
|
|
|
>6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
211,506
|
|
|
14.46
|
|
|
87,791
|
|
|
>6.00
|
|
|
|
|
|
Bank
|
198,991
|
|
|
13.68
|
|
|
114,561
|
|
|
>7.875
|
|
|
116,380
|
|
|
>8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
224,528
|
|
|
15.35
|
|
|
117,054
|
|
|
>8.00
|
|
|
|
|
|
Bank
|
212,013
|
|
|
14.57
|
|
|
143,656
|
|
|
>9.875
|
|
|
145,475
|
|
|
>10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
211,506
|
|
|
11.62
|
|
|
72,817
|
|
|
>4.00
|
|
|
|
|
|
Bank
|
198,991
|
|
|
10.99
|
|
|
72,422
|
|
|
>4.00
|
|
|
90,528
|
|
|
>5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$
|
166,968
|
|
|
11.50
|
%
|
|
$
|
83,476
|
|
|
>5.75
|
%
|
|
|
|
|
Bank
|
184,656
|
|
|
12.79
|
|
|
83,024
|
|
|
>5.75
|
|
|
$
|
93,854
|
|
|
>6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
194,794
|
|
|
13.42
|
|
|
105,253
|
|
|
>7.25
|
|
|
|
|
|
Bank
|
184,656
|
|
|
12.79
|
|
|
104,683
|
|
|
>7.25
|
|
|
115,512
|
|
|
>8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
208,973
|
|
|
14.39
|
|
|
134,288
|
|
|
>9.25
|
|
|
|
|
|
Bank
|
198,465
|
|
|
13.75
|
|
|
133,561
|
|
|
>9.25
|
|
|
144,390
|
|
|
>10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Capital
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
194,794
|
|
|
10.95
|
|
|
71,128
|
|
|
>4.00
|
|
|
|
|
|
Bank
|
184,656
|
|
|
10.43
|
|
|
70,796
|
|
|
>4.00
|
|
|
88,495
|
|
|
>5.00
|
|
______________________
|
|
*
|
Except with regard to the Company's and the Bank's leverage capital ratio, includes the phased-in portion of the Basel III Capital Rule's capital conservation buffer.
|
Note 21 – Segment and Related Information
The Company has
two
reportable segments, community banking and trust and investment services.
Community banking involves making loans to and generating deposits from individuals and businesses. All assets and liabilities of the Company are allocated to community banking. Investment income from securities is also allocated to the community banking segment. Loan fee income, service charges from deposit accounts, and non-deposit fees such as automated teller machine fees and insurance commissions generate additional income for the community banking segment.
Trust and investment services include estate planning, trust account administration, investment management, and retail brokerage. Investment management services include purchasing equity, fixed income, and mutual fund investments for customer accounts. The trust and investment services segment receives fees for investment and administrative services.
Amounts shown in the "Other" column include activities of the Company which are primarily debt service on Trust Preferred Securities and corporate items.
Segment information as of and for the years ended
December 31, 2018
,
2017
, and
2016
, is shown in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Community
Banking
|
|
Trust and
Investment
Services
|
|
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Interest income
|
$
|
68,388
|
|
|
$
|
—
|
|
|
$
|
380
|
|
|
$
|
—
|
|
|
$
|
68,768
|
|
Interest expense
|
8,272
|
|
|
—
|
|
|
1,402
|
|
|
—
|
|
|
9,674
|
|
Noninterest income
|
8,619
|
|
|
4,579
|
|
|
76
|
|
|
—
|
|
|
13,274
|
|
Income (loss) before income taxes
|
28,000
|
|
|
2,165
|
|
|
(1,940
|
)
|
|
—
|
|
|
28,225
|
|
Net income (loss)
|
22,381
|
|
|
1,731
|
|
|
(1,533
|
)
|
|
—
|
|
|
22,579
|
|
Depreciation and amortization
|
2,030
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
2,040
|
|
Total assets
|
1,853,057
|
|
|
—
|
|
|
251,434
|
|
|
(241,625
|
)
|
|
1,862,866
|
|
Goodwill
|
43,872
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,872
|
|
Capital expenditures
|
2,723
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Community
Banking
|
|
Trust and
Investment
Services
|
|
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Interest income
|
$
|
62,697
|
|
|
$
|
—
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
63,038
|
|
Interest expense
|
6,263
|
|
|
—
|
|
|
1,028
|
|
|
—
|
|
|
7,291
|
|
Noninterest income
|
9,224
|
|
|
4,756
|
|
|
247
|
|
|
—
|
|
|
14,227
|
|
Income (loss) before income taxes
|
24,828
|
|
|
2,521
|
|
|
(1,274
|
)
|
|
—
|
|
|
26,075
|
|
Net income (loss)
|
14,456
|
|
|
1,486
|
|
|
(693
|
)
|
|
—
|
|
|
15,249
|
|
Depreciation and amortization
|
2,393
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
2,405
|
|
Total assets
|
1,806,647
|
|
|
—
|
|
|
236,644
|
|
|
(227,213
|
)
|
|
1,816,078
|
|
Goodwill
|
43,872
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,872
|
|
Capital expenditures
|
2,637
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Community
Banking
|
|
Trust and
Investment
Services
|
|
Other
|
|
Intersegment
Eliminations
|
|
Total
|
Interest income
|
$
|
56,076
|
|
|
$
|
—
|
|
|
$
|
94
|
|
|
$
|
—
|
|
|
$
|
56,170
|
|
Interest expense
|
5,438
|
|
|
—
|
|
|
878
|
|
|
—
|
|
|
6,316
|
|
Noninterest income
|
8,848
|
|
|
4,634
|
|
|
23
|
|
|
—
|
|
|
13,505
|
|
Income (loss) before income taxes
|
22,230
|
|
|
2,623
|
|
|
(1,545
|
)
|
|
—
|
|
|
23,308
|
|
Net income (loss)
|
15,486
|
|
|
1,835
|
|
|
(1,020
|
)
|
|
—
|
|
|
16,301
|
|
Depreciation and amortization
|
2,845
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
2,856
|
|
Total assets
|
1,669,629
|
|
|
—
|
|
|
229,241
|
|
|
(220,232
|
)
|
|
1,678,638
|
|
Goodwill
|
43,872
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,872
|
|
Capital expenditures
|
3,609
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
3,613
|
|
Note 22 – Parent Company Financial Information
Condensed Parent Company financial information is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
Condensed Balance Sheets
|
2018
|
|
2017
|
Cash
|
$
|
3,596
|
|
|
$
|
1,597
|
|
Equity securities, at fair value
|
1,830
|
|
|
—
|
|
Securities available for sale, at fair value
|
6,361
|
|
|
8,740
|
|
Investment in subsidiaries
|
239,413
|
|
|
226,452
|
|
Due from subsidiaries
|
170
|
|
|
46
|
|
Other assets
|
64
|
|
|
31
|
|
Total Assets
|
$
|
251,434
|
|
|
$
|
236,866
|
|
|
|
|
|
Junior subordinated debt
|
$
|
27,927
|
|
|
$
|
27,826
|
|
Other liabilities
|
965
|
|
|
323
|
|
Shareholders' equity
|
222,542
|
|
|
208,717
|
|
Total Liabilities and Shareholders' Equity
|
$
|
251,434
|
|
|
$
|
236,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Condensed Statements of Income
|
2018
|
|
2017
|
|
2016
|
Dividends from subsidiary
|
$
|
11,000
|
|
|
$
|
6,000
|
|
|
$
|
16,000
|
|
Other income
|
456
|
|
|
588
|
|
|
117
|
|
Expenses
|
2,396
|
|
|
1,862
|
|
|
1,662
|
|
Income tax benefit
|
(407
|
)
|
|
(581
|
)
|
|
(526
|
)
|
Income before equity in undistributed earnings of subsidiary
|
9,467
|
|
|
5,307
|
|
|
14,981
|
|
Equity in undistributed earnings of subsidiary
|
13,112
|
|
|
9,942
|
|
|
1,320
|
|
Net Income
|
$
|
22,579
|
|
|
$
|
15,249
|
|
|
$
|
16,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Condensed Statements of Cash Flows
|
2018
|
|
2017
|
|
2016
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income
|
$
|
22,579
|
|
|
$
|
15,249
|
|
|
$
|
16,301
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Gain on sale of securities
|
—
|
|
|
(221
|
)
|
|
—
|
|
Equity in (undistributed) distributions of subsidiary
|
(13,112
|
)
|
|
(9,942
|
)
|
|
(1,320
|
)
|
Net change in other assets
|
(194
|
)
|
|
83
|
|
|
(57
|
)
|
Net change in other liabilities
|
136
|
|
|
(82
|
)
|
|
163
|
|
Net cash provided by operating activities
|
9,409
|
|
|
5,087
|
|
|
15,087
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Purchases of securities available for sale
|
—
|
|
|
(373
|
)
|
|
(6,588
|
)
|
Sales of equity securities
|
431
|
|
|
—
|
|
|
—
|
|
Sales of securities available for sale
|
—
|
|
|
500
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
431
|
|
|
127
|
|
|
(6,588
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Common stock dividends paid
|
(8,702
|
)
|
|
(8,384
|
)
|
|
(8,266
|
)
|
Repurchase of common stock
|
—
|
|
|
—
|
|
|
(1,292
|
)
|
Proceeds from exercise of stock options
|
861
|
|
|
113
|
|
|
142
|
|
Net cash used in financing activities
|
(7,841
|
)
|
|
(8,271
|
)
|
|
(9,416
|
)
|
Net increase (decrease) in cash and cash equivalents
|
1,999
|
|
|
(3,057
|
)
|
|
(917
|
)
|
Cash and cash equivalents at beginning of period
|
1,597
|
|
|
4,654
|
|
|
5,571
|
|
Cash and cash equivalents at end of period
|
$
|
3,596
|
|
|
$
|
1,597
|
|
|
$
|
4,654
|
|
Note 23 – Concentrations of Credit Risk
Substantially all of the Company's loans are made within its market area, which includes Southern and Central Virginia and the northern portion of Central North Carolina. The ultimate collectibility of the Company's loan portfolio and the ability to realize the value of any underlying collateral, if necessary, are impacted by the economic conditions and real estate values of the market area.
Loans secured by real estate were
$1,066,411,000
, or
78.6%
of the loan portfolio at
December 31, 2018
, and
$1,080,031,000
, or
80.8%
of the loan portfolio at
December 31, 2017
. Loans secured by commercial real estate represented the largest portion of loans at
$655,800,000
at
December 31, 2018
and
$637,701,000
at
December 31, 2017
,
48.3%
and
47.7%
, respectively, of total loans. There were no concentrations of loans to any individual, group of individuals, business, or industry that exceeded
10%
of total loans at
December 31, 2018
or
2017
.
Note 24 – Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
For the Years ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Supplemental Schedule of Cash and Cash Equivalents:
|
|
|
|
|
|
Cash and due from banks
|
$
|
29,587
|
|
|
$
|
28,594
|
|
|
$
|
20,268
|
|
Interest-bearing deposits in other banks
|
34,668
|
|
|
23,883
|
|
|
32,939
|
|
|
$
|
64,255
|
|
|
$
|
52,477
|
|
|
$
|
53,207
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest on deposits and borrowed funds
|
$
|
9,553
|
|
|
$
|
7,240
|
|
|
$
|
6,348
|
|
Income taxes
|
5,056
|
|
|
7,653
|
|
|
6,477
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned
|
599
|
|
|
1,233
|
|
|
295
|
|
Unrealized loss on securities available for sale
|
(3,290
|
)
|
|
(777
|
)
|
|
(6,572
|
)
|
Unrealized loss on cash flow hedges
|
(804
|
)
|
|
—
|
|
|
—
|
|
Change in unfunded pension liability
|
1,291
|
|
|
(234
|
)
|
|
166
|
|
Note 25 – Accumulated Other Comprehensive Income (Loss)
Changes in each component of accumulated other comprehensive income (loss) ("AOCI") were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
Gains (Losses)
on Securities
|
|
Unrealized Losses on Cash Flow Hedges
|
|
Adjustments
Related to
Pension
Benefits
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at Balance at December 31, 2015
|
$
|
4,122
|
|
|
$
|
—
|
|
|
$
|
(1,832
|
)
|
|
$
|
2,290
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities available for sale, net of tax, $(2,007)
|
(3,729
|
)
|
|
—
|
|
|
—
|
|
|
(3,729
|
)
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains on securities, net of tax, $(293)
|
(543
|
)
|
|
—
|
|
|
—
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
Change in unfunded pension liability, net of tax, $58
|
—
|
|
|
—
|
|
|
108
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
(150
|
)
|
|
—
|
|
|
(1,724
|
)
|
|
(1,874
|
)
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available for sale, net of tax, $12
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains on securities, net of tax, $(284)
|
(528
|
)
|
|
—
|
|
|
—
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
Change in unfunded pension liability, net of tax, $(82)
|
—
|
|
|
—
|
|
|
(152
|
)
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
Reclassification of "stranded" tax effects from tax rate change
|
(141
|
)
|
|
—
|
|
|
(404
|
)
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
(796
|
)
|
|
—
|
|
|
(2,280
|
)
|
|
(3,076
|
)
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities available for sale, net of tax, $(745)
|
(2,464
|
)
|
|
—
|
|
|
—
|
|
|
(2,464
|
)
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains on securities, net of tax, $(18)
|
(63
|
)
|
|
—
|
|
|
—
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
Net unrealized losses on cash flow hedges, net of tax, $(180)
|
—
|
|
|
(624
|
)
|
|
—
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
Change in unfunded pension liability, net of tax, $249
|
—
|
|
|
—
|
|
|
1,042
|
|
|
1,042
|
|
|
|
|
|
|
|
|
|
Reclassification for ASU 2016-01 adoption
|
(650
|
)
|
|
—
|
|
|
—
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(3,973
|
)
|
|
$
|
(624
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(5,835
|
)
|
The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) (dollars in thousands):
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
For the Three Years Ending
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components
|
Amount Reclassified from AOCI
|
|
Affected Line Item in
the Statement of Where
Net Income is Presented
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
Realized gain on sale of securities
|
$
|
81
|
|
|
$
|
812
|
|
|
$
|
836
|
|
|
Securities gains, net
|
|
(18
|
)
|
|
(284
|
)
|
|
(293
|
)
|
|
Income taxes
|
|
$
|
63
|
|
|
$
|
528
|
|
|
$
|
543
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
Reclassification of "stranded" tax effects from tax rate change
|
—
|
|
|
141
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
Reclassification for ASU-2016-01 adoption
|
650
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
|
|
|
|
|
|
Employee benefit plans:
|
|
|
|
|
|
|
|
Reclassification of "stranded" tax effects from tax rate change
|
—
|
|
|
404
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
Total reclassifications
|
$
|
713
|
|
|
$
|
1,073
|
|
|
$
|
543
|
|
|
|
______________________
(1) Reclassification from AOCI to retained earnings for "stranded" tax effects resulting from the impact of the newly enacted federal corporate income tax rate on items included in AOCI.
(2) Reclassification from AOCI to retained earnings for unrealized holding gains on equity securities due to adoption of ASU 2016-01.
Note 26 - Proposed Merger
On October 1, 2018, the Company announced that it had entered into an Agreement and Plan of Reorganization, dated October 1, 2018 (the "Merger Agreement"), with HomeTown Bankshares Corporation ("HomeTown"), pursuant to which the Company will acquire HomeTown in a business combination transaction valued at approximately
$95.6 million
at the time of the announcement. The proposed combination will deepen the Company’s footprint in the Roanoke, Virginia metropolitan area and create a presence in the New River Valley with an office in Christiansburg, Virginia. Upon completion of the merger and with
two
office consolidations, the Company will have
eight
offices in the combined Roanoke/New River Valley market area. The Company expects that it will have approximately
$2.4 billion
in assets upon completion of the merger, based on each company’s reported financial results as of December 31, 2018.
Pursuant and subject to the terms of the Merger Agreement, as a result of the merger, the holders of shares of HomeTown common stock will receive
0.4150
shares of the Company’s common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger.
Subject to customary closing conditions, including regulatory and shareholder approvals, the Company expects the merger to close early in the second quarter of 2019. Following completion of the merger, HomeTown's subsidiary bank, HomeTown Bank, will be merged with and into the Bank.