It is our pleasure to present the year end 2017 Financial Report for Parkway Acquisition Corp. and Skyline National Bank. 2017 marked the first full year of
combined operations since the merger in which Grayson Bankshares, Inc. and Cardinal Bankshares Corp, joined forces to become Parkway Acquisition Corp in July of 2016, and we believe the year was a success. We combined our companies based on the
belief that it would enhance shareholder value through increased earnings potential, increased stock value and increased stock liquidity, among other things, and 2017 saw each of these beliefs come to pass.
Earnings for the year totaled $2.4 million, despite the negative impact of a $1.4 million, nonrecurring charge to income tax expense that came as a result of
the Tax Cuts and Jobs Act which was signed into law on December 22, 2017. Earnings, without the one-time adjustment, totaled $3.8 million, which was consistent with our expectations and demonstrates the solid core earnings potential for our company
going forward. Financially, we ended the year with total assets of $548 million, net loans of $421 million, and total deposits of $488 million. Our equity at year end was $57 million, representing a tangible book value of $10.98 per share.
We were excited to announce on March 1, 2018, that we entered into an Agreement and Plan of Merger with Great State Bank whereby Parkway will acquire Great
State Bank. The agreement provides that, subject to certain terms and conditions, Great State Bank will merge with and into Skyline, with Skyline as the surviving bank in the Merger. Great State Bank is a Wilkesboro, North Carolina-based bank with
branches in Boone, Wilkesboro and Yadkinville, North Carolina and loan production offices in Lenoir and Shelby, North Carolina. As of December 31, 2017, Great State Bank had total assets of $139 million. The proposed merger is expected to be
completed in the third quarter of 2018, subject to approval of both companies shareholders, regulatory approvals, and other customary closing conditions. We are excited about this combination because it will expand our presence into several
North Carolina counties adjacent to our branch in Sparta and our planned branch opening in West Jefferson, which is scheduled for mid-April. You can find additional information about the proposed merger by visiting our website at
www.skylinenationalbank.com
. Check the website as well for an upcoming announcement regarding the grand opening date for the West Jefferson branch. We hope that many of you will be able to attend and help us celebrate the occasion.
In mid-March, you should have received your semi-annual dividend of 10 cents per share, an increase of 2 cents from the September 2017 dividend amount. Your
Board of Directors will address dividends again in the Fall of 2018.
If you have not already done so, we encourage you to be in touch with our transfer agent, Computershare, to complete the transfer of your Grayson and Cardinal shares into shares
of Parkway.
We look forward to seeing you at our 2018 Annual Shareholders Meeting. Notice of the meeting, including the date, time, and
location, will be provided by mail and posted on our website as soon as it becomes available. We always appreciate the opportunity to visit with our shareholders, listen to your comments, and answer any questions you may have.
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant
Accounting Policies
Organization
Parkway
Acquisition Corp. (Parkway) was incorporated as a Virginia corporation on November 2, 2015. Parkway was formed as a business combination shell for the purpose of completing a business combination transaction between Grayson
Bankshares, Inc. (Grayson) and Cardinal Bankshares Corporation (Cardinal). On November 6, 2015, Grayson, Cardinal and Parkway entered into an Agreement and Plan of Merger (the merger agreement), providing for
the combination of the three companies. Terms of the merger agreement called for Grayson and Cardinal to merge with and into Parkway, with Parkway as the surviving corporation (the merger). The merger agreement established exchange
ratios under which each share of Grayson common stock was converted to the right to receive 1.76 shares of common stock of Parkway, while each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of
Parkway. The exchange ratios resulted in Grayson shareholders receiving approximately 60% of the newly issued Parkway shares and Cardinal shareholders receiving approximately 40% of the newly issued Parkway shares. The merger was completed on
July 1, 2016. Grayson is considered the acquiror and Cardinal is considered the acquiree in the transaction for accounting purposes.
Upon completion
of the merger, the Bank of Floyd, a wholly-owned subsidiary of Cardinal, was merged with and into Grayson National Bank (the Bank), a wholly-owned subsidiary of Grayson. The Bank was organized under the laws of the United States in 1900
and now serves the Virginia counties of Grayson, Floyd, Carroll, Wythe, Montgomery and Roanoke, and the surrounding areas through sixteen full-service banking offices and two loan production offices. Effective March 13, 2017, the Bank changed
its name to Skyline National Bank. As an FDIC-insured National Banking Association, the Bank is subject to regulation by the Comptroller of the Currency. Parkway is regulated by the Board of Governors of the Federal Reserve System.
For purposes of this annual report on Form
10-K,
all information contained herein as of and for periods prior to
July 1, 2016 reflects the operations of Grayson prior to the merger. Unless this report otherwise indicates or the context otherwise requires, all references to Parkway or the Company as of and for periods subsequent to
July 1, 2016 refer to the combined company and its subsidiary as a combined entity after the merger, and all references to the Company as of and for periods prior to July 1, 2016 are references to Grayson and its subsidiary as
a combined entity prior to the merger.
Critical Accounting Policies
Management believes the policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments involve
a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported
results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
Principles of Consolidation
The consolidated
financial statements include the accounts of the Company and the Bank, which is wholly owned. All significant, intercompany transactions and balances have been eliminated in consolidation.
Business Segments
The Company reports its
activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource
allocation and performance assessment.
49
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Business Combinations
Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are
businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and
liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving
significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values
becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for loan losses related to the acquired loans is
recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and
the amount and timing of expected principal, interest and other cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 relate to the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent
appraisals for significant properties.
Substantially all of the Banks loan portfolio consists of loans in its market area. Accordingly, the
ultimate collectability of a substantial portion of the Banks loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy
is diverse, but influenced to an extent by the manufacturing and agricultural segments.
While management uses available information to recognize loan and
foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Banks
allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these
factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.
The Company
seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred
tax benefits. The Companys tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the
corresponding financial statement impact, can be difficult to predict with accuracy.
Accounting for pension benefits, costs and related liabilities are
developed using actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension costs may occur in the future due
to changes in these assumptions.
50
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection),
interest-bearing deposits with banks and federal funds sold.
Trading Securities
The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.
Securities Held to Maturity
Bonds, notes, and
debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. The
Company does not currently hold any securities classified as held to maturity.
Securities Available for Sale
Available for sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading
securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net
amount in a separate component of accumulated other comprehensive income. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity.
Declines in the fair value of individual held to maturity and available for sale
securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.
Loans Receivable
Loans receivable that management
has the intent and ability to hold for the foreseeable future or until maturity or
pay-off
are reported at their outstanding principal amount adjusted for any charge-offs and the allowance for loan losses.
Loan origination costs are capitalized and recognized as an adjustment to yield over the life of the related loan.
Interest is accrued and credited to
income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to interest. When facts and
circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.
Purchased Performing Loans
The Company accounts for performing loans acquired in business combinations using the contractual cash flows method
of recognizing discount accretion based on the acquired loans contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the
estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the
acquisition
51
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Loans Receivable, continued
Purchased Credit-Impaired (PCI) Loans
Loans purchased with evidence of credit deterioration since origination, and for which it is
probable that all contractually required payments will not be collected, are considered credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade and past due and nonaccrual
status. Purchased impaired loans generally meet the Companys definition for nonaccrual status. PCI loans are initially measured at fair value, which reflects estimated future credit losses expected to be incurred over the life of the loan.
Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is
recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. The difference between contractually required payments at acquisition and the cash flows
expected to be collected at acquisition is referred to as the nonaccretable difference, and is available to absorb credit losses on those loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.
Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the nonaccretable difference with a positive impact on future interest income.
Allowance for Loan Losses
The allowance for loan
losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance, or portion
thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to
repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component is calculated on an individual basis for larger-balance,
non-homogeneous
loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is
lower than its carrying value. The specific component of the allowance for smaller- balance loans whose terms have been modified in a troubled debt restructuring (TDR) is calculated on a pooled basis considering historical experience adjusted for
qualitative factors. The general component covers
non-impaired
loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties
that could affect managements estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general
losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a
case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the
delay, the borrowers 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 all loans by either the present value of expected future cash flows
discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
52
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Troubled Debt Restructurings
Under GAAP, the Bank is required to account for certain loan modifications or restructurings as troubled debt restructurings or troubled debt
restructured loans. In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank for economic or legal reasons related to the borrowers financial difficulties grants a concession to
the borrower that the Bank would not otherwise consider. Debt restructuring or loan modifications for a borrower do not necessarily always constitute a troubled debt restructuring, however, and troubled debt restructurings do not necessarily
result in
non-accrual
loans. Troubled debt restructured loans are maintained in nonaccrual status until they have been performing in accordance with modified terms for a period of at least six months.
Property and Equipment
Land is carried at
cost. Bank premises, furniture and equipment are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:
|
|
|
|
|
|
|
Years
|
|
Buildings and improvements
|
|
|
10-40
|
|
Furniture and equipment
|
|
|
5-12
|
|
Foreclosed Assets
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is 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 foreclosure expense on the consolidated statements of income.
Pension Plan
Prior to the merger, both Grayson National Bank (Grayson) and Bank of Floyd (Floyd) had qualified noncontributory defined benefit pension plans in
place which covered substantially all of each banks employees. The benefits in each plan are primarily based on years of service and earnings. Both Grayson and Floyd plans were amended to freeze benefit accruals for all eligible employees
prior to the effective date of the merger. Graysons plan is a single-employer plan, the funded status of which is measured as the difference between the fair value of plan assets and the projected benefit obligation. Floyds plan is a
multi-employer plan for accounting purposes and is a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
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 Bank; (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 Bank 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.
Core Deposit Intangible
Core deposit intangibles represent the value of long-term deposit relationships acquired in a business combination. Core deposit intangibles are
amortized over the estimated useful lives of the deposit accounts acquired (generally twenty years on an accelerated basis).
53
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Income Taxes
Provision for income taxes is based on amounts reported in the statements of income (after exclusion of
non-taxable
income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax expense results from changes in deferred tax
assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a
likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially
and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of
whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to managements judgment. Deferred tax assets are reduced by
a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company has early adopted ASU
2018-02,
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income which is considered a change in accounting principle. Because the required adjustment of deferred taxes is required to be included in income from continuing operations, the tax effects of items within accumulated
other comprehensive income (commonly referred to as stranded tax effects) would not reflect the appropriate tax rate. Adoption of this ASU eliminates the stranded tax effects associated with the change in the federal
corporate income tax rate in the Tax Cuts and Jobs Act of 2017. The Company has reclassified stranded tax effects totaling $248 thousand from accumulated other comprehensive loss to retained earnings and these reclassified
amounts are reflected in the accompanying consolidated statements of changes in stockholders equity.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on
securities available for sale and changes in the funded status of the pension plan which are also recognized as separate components of equity. The accumulated balances related to each component of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Unrealized Gains
And Losses
On Available for
Sale Securities
|
|
|
Defined Benefit
Pension Items
|
|
|
Total
|
|
Balance, December 31, 2015
|
|
$
|
(116
|
)
|
|
$
|
(608
|
)
|
|
$
|
(724
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(218
|
)
|
|
|
(172
|
)
|
|
|
(390
|
)
|
Amounts reclassified from accumulated other comprehensive (loss)
|
|
|
(240
|
)
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
(574
|
)
|
|
$
|
(780
|
)
|
|
$
|
(1,354
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
296
|
|
|
|
(44
|
)
|
|
|
252
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
(160
|
)
|
|
|
0
|
|
|
|
(160
|
)
|
Amounts reclassified to retained earnings from other comprehensive loss due to tax rate
change
|
|
|
(85
|
)
|
|
|
(163
|
)
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
(523
|
)
|
|
$
|
(987
|
)
|
|
$
|
(1,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Advertising Expense
The Company expenses advertising costs as they are incurred. Advertising expense for the years presented is not material.
Basic Earnings per Share
Basic earnings per share
is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.
Off-Balance
Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements,
commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Fair Value of Financial
Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in
Note 12. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassification
Certain reclassifications have
been made to the prior years financial statements to place them on a comparable basis with the current presentation. Net income and stockholders equity previously reported were not affected by these reclassifications.
Recent Accounting Pronouncements
The following
accounting standards may affect the future financial reporting by the Company:
In May 2014, the FASB issued guidance to change the recognition of revenue
from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to
receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a full retrospective approach. The Companys revenue is comprised of net interest
income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of
our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of revenue
recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses. We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance, we do
anticipate changes in our disclosures associated with our revenues. We will provide qualitative disclosures of our performance obligations related to our revenue recognition and we continue to evaluate disaggregation for significant categories of
revenue in the scope of the guidance.
In August 2015, the FASB deferred the effective date of ASU
2014-09,
Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU
2014-09
will be effective for the Company for reposting periods beginning after December 15, 2017. The Company will
apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
55
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to
address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will
be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement,
presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is
currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
We
expect to adopt the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental
balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts and activities. We have also started developing our methodology to estimate the
right-of
use assets and
lease liabilities, which is based on the present value of lease payments. We do not expect a material change to the timing of expense recognition, but we are early in the implementation process and will continue to evaluate the impact. We are
evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.
In March 2016, the FASB amended
the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent
in contracts that include three or more parties.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its
financial statements.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify
guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017
.
The Company does not expect
these amendments to have a material effect on its financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses
and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after
December 15, 2018. The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we
do not expect to elect that option. We are evaluating the impact of the ASU on our consolidated financial statements. We expect the ASU will result in an increase in the recorded allowance for loan losses given the change to estimated losses over
the contractual life of the loans adjusted for expected prepayments. The majority of the increase results from longer duration portfolios. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt
securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolios composition and credit quality at the adoption date as well as economic conditions and forecasts at that
time.
56
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with
Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective for the
Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too
broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Company for reporting periods beginning after December 15,
2017.
Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In January
2017, the FASB updated the Accounting Changes and Error Corrections and the InvestmentsEquity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC
guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional
disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.
In February 2017, the FASB amended the Other Income Topic of the Accounting Standards Codification to clarify the scope of the guidance on nonfinancial asset
derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective
for the Company for reporting periods beginning after December 15, 2017.
The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, the FASB amended the requirements in the CompensationRetirement Benefits Topic of the Accounting Standards Codification related to the
income statement presentation of the components of net periodic benefit cost for an entitys sponsored defined benefit pension and other postretirement plans. The amendments will be effective for the Company for interim and annual periods
beginning after December 15, 2017
.
Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, the FASB amended the requirements in the ReceivablesNonrefundable Fees and Other Costs Topic of the Accounting Standards Codification
related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Company for
interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topics of the Accounting Standards Codification. The
amendments incorporate into the Accounting Standards Codification recent SEC guidance related to revenue recognition. The amendments were effective upon issuance. The Company is currently evaluating the impact on revenue recognition, however it does
not expect these amendments to have a material effect on its financial statements.
57
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In February 2018, the FASB Issued ASU
2018-02,
Income Statement
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the
tax rates under the Tax Cuts and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application to each period in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is
recognized. The impact of the reclassification from other comprehensive income to retained earnings is $248 thousand for the year ended December 31, 2017.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the
Companys consolidated financial position, results of operations or cash flows.
Note 2. Business Combinations
On July 1, 2016, Parkway completed its merger with Grayson and Cardinal. Parkway had no material assets or liabilities and did not conduct any business
prior to consummation of the merger except to perform its obligations under the merger agreement. As such, Grayson was considered the acquiring entity in this business combination for accounting purposes. Under the terms of the merger agreement,
each share of Grayson common stock was converted to the right to receive 1.76 shares of common stock of Parkway, while each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of Parkway. There was no
trading market and no market price for Parkway common stock on the date of the transaction. Parkway was quoted on the OTC Markets and began trading on August 31, 2016; however, Parkway was a new company and the stock was thinly traded. Grayson,
as the accounting acquirer at the time of the merger, was also thinly traded and the limited number of shares traded prior to the acquisition were not considered indicative of trading value. Due to the limited trading history of Parkway and Grayson,
the Company engaged a third party to determine the value of the transaction as well as the value of the consideration paid to Cardinal as a result of the transaction. The Company also engaged a third party to calculate fair values of all assets and
liabilities acquired in the transaction. These valuations were subject to review and refinement for up to one year following the merger date, however so subsequent valuation adjustments were made.
58
Notes to Consolidated Financial Statements
Note 2. Business Combinations, continued
The following table presents the Cardinal assets acquired and liabilities assumed as of July 1, 2016 as
well as the related fair value adjustments and determination of purchase gain.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
As Reported by
Cardinal
|
|
|
Fair Value
Adjustments
|
|
|
As Reported by
Parkway
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,698
|
|
|
$
|
|
|
|
$
|
11,698
|
|
Investment securities
|
|
|
59,327
|
|
|
|
(322
|
)(a)
|
|
|
59,005
|
|
Restricted equity securities
|
|
|
1,308
|
|
|
|
|
|
|
|
1,308
|
|
Loans
|
|
|
164,044
|
|
|
|
(6,192
|
)(b)
|
|
|
157,852
|
|
Allowance for loan losses
|
|
|
(2,123
|
)
|
|
|
2,123
|
(c)
|
|
|
|
|
Cash value of life insurance
|
|
|
6,714
|
|
|
|
|
|
|
|
6,714
|
|
Property and equipment
|
|
|
5,384
|
|
|
|
1,039
|
(d)
|
|
|
6,423
|
|
Intangible assets
|
|
|
|
|
|
|
2,469
|
(e)
|
|
|
2,469
|
|
Accrued interest receivable
|
|
|
539
|
|
|
|
-
|
|
|
|
539
|
|
Other assets
|
|
|
2,450
|
|
|
|
4,677
|
(f)
|
|
|
7,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
249,341
|
|
|
$
|
3,794
|
|
|
$
|
253,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
218,671
|
|
|
$
|
602
|
(g)
|
|
$
|
219,273
|
|
Borrowings
|
|
|
8,000
|
|
|
|
|
(h)
|
|
|
8,000
|
|
Accrued interest payable
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Other liabilities
|
|
|
1,289
|
|
|
|
147
|
(i)
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities acquired
|
|
$
|
227,995
|
|
|
$
|
749
|
|
|
$
|
228,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
|
|
|
|
|
24,391
|
|
Total consideration paid
|
|
|
|
|
|
|
|
|
|
|
23,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase gain
|
|
|
|
|
|
|
|
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Explanation of fair value adjustments:
|
(a)
|
Reflects the opening fair value of securities portfolio, which was established as the new book basis of the portfolio.
|
|
(b)
|
Reflects the fair value adjustment based on the Companys third party valuation report.
|
|
(c)
|
Existing allowance for loan losses eliminated to reflect accounting guidance.
|
|
(d)
|
Estimated adjustment to Cardinals real property based upon third-party appraisals and the Companys evaluation of equipment and other fixed assets.
|
|
(e)
|
Reflects the recording of the estimated core deposit intangible based on the Companys third party valuation report.
|
|
(f)
|
Recording of deferred tax asset generated by the net fair value adjustments (tax rate = 34%). Also recognizes partial reversal of Cardinals deferred tax asset valuation allowance.
|
|
(g)
|
Estimated fair value adjustment to time deposits based on the Companys third party evaluation report on deposits assumed.
|
|
(h)
|
Cardinals borrowings were overnight borrowings and carried at fair value therefore no adjustment was required.
|
|
(i)
|
Reflects the fair value adjustment based on the Companys evaluation of acquired other liabilities.
|
The
merger was accounted for under the acquisition method of accounting. The assets and liabilities of Cardinal were recorded at their estimated fair values and added to those of Grayson for periods following the merger date. Valuations of acquired
Cardinal assets and liabilities were subject to refinement for up to one year following the merger date.
59
Notes to Consolidated Financial Statements
Note 2. Business Combinations, continued
There are two methods to account for acquired loans as part of a business combination. Acquired loans that
contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected future proceeds in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC)
310-30.
All other acquired loans are recorded at their initial fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and any other
adjustment to carrying value in accordance with ASC
310-20.
Due to the limited trading history of Parkway and
Grayson, the Company engaged a third party to determine the value of the transaction as well as the value of the consideration paid to Cardinal as a result of the transaction. The determined value of consideration received by Cardinal, when compared
to the fair value of the net assets acquired from Cardinal, resulted in a bargain purchase gain of $891 thousand. The determined value of consideration received by Cardinal represented a premium when compared to the market price of Parkway
stock, which was not publicly traded on the date of the merger. The premium results from enhanced cash flows and a lower required rate of return which are expected to be realized by Parkway, as compared to Grayson or Cardinal on a standalone basis.
The merger of Grayson and Cardinal is expected to increase loan revenues due to an increased legal lending limit and expanded market area. Fee income is also expected to increase due to the larger deposit population. Significant cost savings are
expected to be realized, particularly in the areas of salaries and benefits, data processing fees, and professional fees. A lower required rate of return is anticipated due to increased access to capital and an expected increase in liquidity of
shares due to higher trading volumes.
The following table presents the assets and liabilities of Parkway and Grayson prior to the merger, the estimated
fair value of Cardinal assets acquired and liabilities assumed, and the resulting estimated balance sheet of Parkway immediately following the merger on July 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Pre-Merger
Parkway
|
|
|
Pre-Merger
Grayson
|
|
|
Cardinal
Acquired
|
|
|
Post-Merger
Parkway
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
13,117
|
|
|
$
|
11,698
|
|
|
$
|
24,815
|
|
Investment securities
|
|
|
|
|
|
|
33,847
|
|
|
|
59,005
|
|
|
|
92,852
|
|
Restricted equity securities
|
|
|
|
|
|
|
971
|
|
|
|
1,308
|
|
|
|
2,279
|
|
Loans
|
|
|
|
|
|
|
244,800
|
|
|
|
157,852
|
|
|
|
402,652
|
|
Allowance for loan losses
|
|
|
|
|
|
|
(3,309
|
)
|
|
|
-
|
|
|
|
(3,309
|
)
|
Cash value of life insurance
|
|
|
|
|
|
|
10,122
|
|
|
|
6,714
|
|
|
|
16,836
|
|
Foreclosed assets
|
|
|
|
|
|
|
95
|
|
|
|
-
|
|
|
|
95
|
|
Property and equipment
|
|
|
|
|
|
|
11,548
|
|
|
|
6,423
|
|
|
|
17,971
|
|
Goodwill and other intangible assets
|
|
|
|
|
|
|
-
|
|
|
|
2,469
|
|
|
|
2,469
|
|
Accrued interest receivable
|
|
|
|
|
|
|
1,253
|
|
|
|
539
|
|
|
|
1,792
|
|
Other assets
|
|
|
|
|
|
|
5,044
|
|
|
|
7,127
|
|
|
|
12,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
317,488
|
|
|
$
|
253,135
|
|
|
$
|
570,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
274,265
|
|
|
$
|
219,273
|
|
|
$
|
493,538
|
|
Borrowings
|
|
|
|
|
|
|
10,000
|
|
|
|
8,000
|
|
|
|
18,000
|
|
Accrued interest payable
|
|
|
|
|
|
|
96
|
|
|
|
35
|
|
|
|
131
|
|
Other liabilities
|
|
|
|
|
|
|
1,146
|
|
|
|
1,436
|
|
|
|
2,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
285,507
|
|
|
$
|
228,744
|
|
|
$
|
514,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
$
|
|
|
|
$
|
31,981
|
|
|
$
|
24,391
|
|
|
$
|
56,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Notes to Consolidated Financial Statements
Note 2. Business Combinations, continued
Supplemental Pro Forma Information (dollars in thousands except per share data)
The table below presents supplemental pro forma information as if the Cardinal acquisition had occurred at the beginning of the earliest period presented,
which was January 1, 2016. Pro forma results include adjustments for amortization and accretion of fair value adjustments and do not include any projected cost savings or other anticipated benefits of the merger. Therefore, the pro forma financial
information is not indicative of the results of operations that would have occurred had the transactions been effected on the assumed date. Pre-tax merger-related costs of $1.5 million are included in the Companys consolidated statements of
operations for the year ended December 31, 2016, and are not included in the pro forma information below.
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
|
(unaudited)
|
|
Net interest income
|
|
$
|
19,620
|
|
Net income (a)
|
|
$
|
2,935
|
|
Basic and diluted weighted average shares outstanding (b)
|
|
|
5,021,376
|
|
Basic and diluted earnings per common share
|
|
$
|
0.58
|
|
|
(a)
|
Supplemental pro forma net income includes the impact of certain fair value adjustments. Supplemental pro forma net income does not include assumptions on cost savings or the impact of merger-related expenses.
|
|
(b)
|
Weighted average shares outstanding includes the full effect of the common stock issued in connection with the Cardinal acquisition as of the earliest reporting date.
|
From the acquisition date of July 1, 2016 through December 31, 2016, Cardinal recorded actual net interest income of $3.5 million,
non-interest
income of $415 thousand, and net income of $133 thousand. These results do not include adjustments for amortization and accretion of fair value adjustments resulting from the application of
purchase accounting guidance.
61
Notes to Consolidated Financial Statements
Note 3. Restrictions on Cash
To comply with banking regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was
approximately $3.6 million and $4.6 million for the periods including December 31, 2017 and 2016, respectively.
Note 4. Investment
Securities
Debt and equity securities have been classified in the consolidated balance sheets according to managements intent. The amortized
cost of securities and their approximate fair values at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
28,780
|
|
|
$
|
0
|
|
|
$
|
(626
|
)
|
|
$
|
28,154
|
|
Corporate securities
|
|
|
3,016
|
|
|
|
0
|
|
|
|
(80
|
)
|
|
|
2,936
|
|
State and municipal securities
|
|
|
19,542
|
|
|
|
155
|
|
|
|
(112
|
)
|
|
|
19,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,338
|
|
|
$
|
155
|
|
|
$
|
(818
|
)
|
|
$
|
50,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
2,046
|
|
|
$
|
236
|
|
|
$
|
(73
|
)
|
|
$
|
2,209
|
|
Mortgage-backed securities
|
|
|
36,021
|
|
|
|
4
|
|
|
|
(823
|
)
|
|
|
35,202
|
|
Corporate securities
|
|
|
3,061
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
2,974
|
|
State and municipal securities
|
|
|
22,282
|
|
|
|
97
|
|
|
|
(224
|
)
|
|
|
22,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,410
|
|
|
$
|
337
|
|
|
$
|
(1,207
|
)
|
|
$
|
62,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted equity securities were $1.4 million and $1.1 million at December 31, 2017 and 2016, respectively.
Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB), Community Bankers Bank, Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of which are carried at cost. All of
these entities are upstream correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money. The Bank is required to hold that stock so long as it borrows from the FHLB. The
Federal Reserve requires Banks to purchase stock as a condition for membership in the Federal Reserve System. The Banks stock in Community Bankers Bank and Pacific Coast Bankers Bank is restricted only in the fact that the stock may only be
repurchased by the respective banks.
The following tables details unrealized losses and related fair values in the Companys held to maturity and
available for sale investment securities portfolios. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
(dollars in thousands)
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
15,791
|
|
|
$
|
(324
|
)
|
|
$
|
12,361
|
|
|
$
|
(302
|
)
|
|
$
|
28,152
|
|
|
$
|
(626
|
)
|
Corporate securities
|
|
|
1,506
|
|
|
|
(10
|
)
|
|
|
1,430
|
|
|
|
(70
|
)
|
|
|
2,936
|
|
|
|
(80
|
)
|
State and municipal securities
|
|
|
5,284
|
|
|
|
(44
|
)
|
|
|
2,758
|
|
|
|
(68
|
)
|
|
|
8,042
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
22,581
|
|
|
$
|
(378
|
)
|
|
$
|
16,549
|
|
|
$
|
(440
|
)
|
|
$
|
39,130
|
|
|
$
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,924
|
|
|
$
|
(73
|
)
|
|
$
|
1,924
|
|
|
$
|
(73
|
)
|
Mortgage-backed securities
|
|
|
31,759
|
|
|
|
(789
|
)
|
|
|
688
|
|
|
|
(34
|
)
|
|
|
32,447
|
|
|
|
(823
|
)
|
Corporate securities
|
|
|
1,548
|
|
|
|
(12
|
)
|
|
|
1,425
|
|
|
|
(75
|
)
|
|
|
2,973
|
|
|
|
(87
|
)
|
State and municipal securities
|
|
|
12,208
|
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
12,208
|
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
45,515
|
|
|
$
|
(1,025
|
)
|
|
$
|
4,037
|
|
|
$
|
(182
|
)
|
|
$
|
49,552
|
|
|
$
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
Notes to Consolidated Financial Statements
Note 4. Investment Securities, continued
At December 31, 2017, 35 debt securities with unrealized losses had depreciated 2.05 percent from
their total amortized cost basis. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length
of time and the extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer. The relative significance of these and other factors will vary on a case by case basis. In analyzing an
issuers financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuers financial
condition and the issuers anticipated ability to pay the contractual cash flows of the investments. Since the Company intends to hold all of its investment securities until maturity, and it is more likely than not that the Company will not
have to sell any of its investment securities before unrealized losses have been recovered, and the Company expects to recover the entire amount of the amortized cost basis of all its securities, none of the securities are deemed other than
temporarily impaired at December 31, 2017. Management continues to monitor all of these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that
time indicate some or all of these securities are other than temporarily impaired, which could require a charge to earnings in such periods.
Proceeds
from the sales of investment securities available for sale were $8.7 and $55.1 million for the years ended December 31, 2017 and 2016, respectively. Gross realized gains and losses for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Realized gains
|
|
$
|
257
|
|
|
$
|
369
|
|
Realized losses
|
|
|
(15
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242
|
|
|
$
|
364
|
|
|
|
|
|
|
|
|
|
|
There were no securities transferred between the available for sale and held to maturity portfolios or other sales of held to
maturity securities during the periods presented. In the future management may elect to classify securities as held to maturity based upon such considerations as the nature of the security, the Banks ability to hold the security until
maturity, and general economic conditions.
The scheduled maturities of securities available for sale at December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
729
|
|
|
$
|
730
|
|
Due after one year through five years
|
|
|
8,435
|
|
|
|
8,398
|
|
Due after five years through ten years
|
|
|
21,371
|
|
|
|
20,975
|
|
Due after ten years
|
|
|
20,803
|
|
|
|
20,572
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,338
|
|
|
$
|
50,675
|
|
|
|
|
|
|
|
|
|
|
Maturities of mortgage backed securities are based on contractual amounts. Actual maturity will vary as loans underlying the
securities are prepaid.
Investment securities with amortized cost of approximately $11.2 million at December 31, 2017 and 2016, were pledged as
collateral on public deposits and for other purposes as required or permitted by law.
63
Notes to Consolidated Financial Statements
Note 5. Loans Receivable
The major components of loans in the consolidated balance sheets at December 31, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Commercial & agricultural
|
|
$
|
25,672
|
|
|
$
|
26,086
|
|
Commercial mortgage
|
|
|
125,661
|
|
|
|
128,515
|
|
Construction & development
|
|
|
25,475
|
|
|
|
26,464
|
|
Farmland
|
|
|
33,353
|
|
|
|
33,531
|
|
Residential
|
|
|
199,120
|
|
|
|
187,188
|
|
Consumer & other
|
|
|
15,590
|
|
|
|
10,184
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
424,871
|
|
|
|
411,968
|
|
Allowance for loan losses
|
|
|
(3,453
|
)
|
|
|
(3,420
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan losses
|
|
$
|
421,418
|
|
|
$
|
408,548
|
|
|
|
|
|
|
|
|
|
|
The major components of loans, net of fair value adjustments, acquired from Cardinal as of July 1, 2016, the acquisition
date, are as follows:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Commercial & agricultural
|
|
$
|
15,897
|
|
Commercial mortgage
|
|
|
76,968
|
|
Construction & development
|
|
|
7,800
|
|
Farmland
|
|
|
4,146
|
|
Residential
|
|
|
49,609
|
|
Consumer & other
|
|
|
3,432
|
|
|
|
|
|
|
Total loans acquired
|
|
$
|
157,852
|
|
|
|
|
|
|
As of the acquisition date, all loans acquired from Cardinal were considered to be performing loans therefore there were no
purchased credit impaired loans.
As of December 31, 2017 and 2016, substantially all of the Banks residential
1-4
family loans were pledged as collateral toward borrowings with the Federal Home Loan Bank.
Note 6.
Allowance for Loan Losses and Impaired Loans
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent
risks in the loan portfolio. The allowance is provided based upon managements comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan
portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of
loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance,
non-homogeneous
loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is
lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a troubled debt restructuring (TDR) is calculated on a pooled basis considering historical experience adjusted for
qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness
of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.
64
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan
portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for
loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.
The following
table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of December 31, 2017 and December 31, 2016:
Allowance for Loan Losses and Recorded Investment in Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Construction
&
Development
|
|
|
Farmland
|
|
|
Residential
|
|
|
Commercial
Mortgage
|
|
|
Commercial
&
Agricultural
|
|
|
Consumer
& Other
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
319
|
|
|
$
|
342
|
|
|
$
|
1,841
|
|
|
$
|
600
|
|
|
$
|
210
|
|
|
$
|
108
|
|
|
$
|
3,420
|
|
Charge-offs
|
|
|
(33
|
)
|
|
|
(34
|
)
|
|
|
(89
|
)
|
|
|
(59
|
)
|
|
|
(27
|
)
|
|
|
(76
|
)
|
|
|
(318
|
)
|
Recoveries
|
|
|
56
|
|
|
|
0
|
|
|
|
23
|
|
|
|
0
|
|
|
|
33
|
|
|
|
22
|
|
|
|
134
|
|
Provision
|
|
|
(103
|
)
|
|
|
50
|
|
|
|
100
|
|
|
|
78
|
|
|
|
66
|
|
|
|
26
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
239
|
|
|
$
|
358
|
|
|
$
|
1,875
|
|
|
$
|
619
|
|
|
$
|
282
|
|
|
$
|
80
|
|
|
$
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
49
|
|
|
$
|
42
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
239
|
|
|
$
|
309
|
|
|
$
|
1,833
|
|
|
$
|
619
|
|
|
$
|
282
|
|
|
$
|
80
|
|
|
$
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
25,475
|
|
|
$
|
33,353
|
|
|
$
|
199,120
|
|
|
$
|
125,661
|
|
|
$
|
25,672
|
|
|
$
|
15,590
|
|
|
$
|
424,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
0
|
|
|
$
|
5,069
|
|
|
$
|
1,556
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
25,475
|
|
|
$
|
28,284
|
|
|
$
|
197,564
|
|
|
$
|
125,661
|
|
|
$
|
25,672
|
|
|
$
|
15,590
|
|
|
$
|
418,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
344
|
|
|
$
|
435
|
|
|
$
|
1,887
|
|
|
$
|
578
|
|
|
$
|
136
|
|
|
$
|
38
|
|
|
$
|
3,418
|
|
Charge-offs
|
|
|
(20
|
)
|
|
|
|
|
|
|
(84
|
)
|
|
|
(21
|
)
|
|
|
(19
|
)
|
|
|
(70
|
)
|
|
|
(214
|
)
|
Recoveries
|
|
|
98
|
|
|
|
59
|
|
|
|
22
|
|
|
|
|
|
|
|
8
|
|
|
|
34
|
|
|
|
221
|
|
Provision
|
|
|
(103
|
)
|
|
|
(152
|
)
|
|
|
16
|
|
|
|
43
|
|
|
|
85
|
|
|
|
106
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
319
|
|
|
$
|
342
|
|
|
$
|
1,841
|
|
|
$
|
600
|
|
|
$
|
210
|
|
|
$
|
108
|
|
|
$
|
3,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
|
|
|
$
|
57
|
|
|
$
|
184
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
319
|
|
|
$
|
285
|
|
|
$
|
1,657
|
|
|
$
|
600
|
|
|
$
|
210
|
|
|
$
|
108
|
|
|
$
|
3,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
26,464
|
|
|
$
|
33,531
|
|
|
$
|
187,188
|
|
|
$
|
128,515
|
|
|
$
|
26,086
|
|
|
$
|
10,184
|
|
|
$
|
411,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
580
|
|
|
$
|
5,030
|
|
|
$
|
1,533
|
|
|
$
|
114
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
25,884
|
|
|
$
|
28,501
|
|
|
$
|
185,655
|
|
|
$
|
128,401
|
|
|
$
|
26,086
|
|
|
$
|
10,184
|
|
|
$
|
404,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 and December 31, 2016, the Bank had no unallocated reserves included in the allowance for
loan losses.
65
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Banks
loan portfolio. The Banks loan ratings coincide with the Substandard, Doubtful and Loss classifications used by federal regulators in their examination of financial institutions. Generally, an asset is
considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial
institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not
warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated
Special Mention. Management also maintains a listing of loans designated Watch. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that
indicate above average risk. As of December 31, 2017 and December 31, 2016, respectively, the Bank had no loans graded Doubtful or Loss included in the balance of total loans outstanding.
The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of December 31, 2017
and December 31, 2016:
Credit Risk Profile by Internally Assigned Grades
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Grades
|
|
|
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
24,612
|
|
|
$
|
652
|
|
|
$
|
0
|
|
|
$
|
211
|
|
|
$
|
25,475
|
|
Farmland
|
|
|
23,935
|
|
|
|
4,895
|
|
|
|
74
|
|
|
|
4,449
|
|
|
|
33,353
|
|
Residential
|
|
|
183,543
|
|
|
|
12,464
|
|
|
|
200
|
|
|
|
2,913
|
|
|
|
199,120
|
|
Commercial mortgage
|
|
|
106,102
|
|
|
|
15,291
|
|
|
|
1,611
|
|
|
|
2,657
|
|
|
|
125,661
|
|
Non-Real
Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & agricultural
|
|
|
22,446
|
|
|
|
2,057
|
|
|
|
649
|
|
|
|
520
|
|
|
|
25,672
|
|
Consumer & other
|
|
|
15,262
|
|
|
|
328
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,900
|
|
|
$
|
35,687
|
|
|
$
|
2,534
|
|
|
$
|
10,750
|
|
|
$
|
424,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
24,659
|
|
|
$
|
902
|
|
|
$
|
|
|
|
$
|
903
|
|
|
$
|
26,464
|
|
Farmland
|
|
|
23,201
|
|
|
|
5,276
|
|
|
|
|
|
|
|
5,054
|
|
|
|
33,531
|
|
Residential
|
|
|
170,885
|
|
|
|
14,081
|
|
|
|
|
|
|
|
2,222
|
|
|
|
187,188
|
|
Commercial mortgage
|
|
|
105,317
|
|
|
|
13,449
|
|
|
|
3,353
|
|
|
|
6,396
|
|
|
|
128,515
|
|
Non-Real
Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & agricultural
|
|
|
22,719
|
|
|
|
2,333
|
|
|
|
485
|
|
|
|
549
|
|
|
|
26,086
|
|
Consumer & other
|
|
|
10,018
|
|
|
|
126
|
|
|
|
|
|
|
|
40
|
|
|
|
10,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
356,799
|
|
|
$
|
36,167
|
|
|
$
|
3,838
|
|
|
$
|
15,164
|
|
|
$
|
411,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
Loans may be placed in nonaccrual status when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to
interest. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a
subsequent restructuring thereof.
The following table presents an age analysis of nonaccrual and past due loans by category as of December 31, 2017
and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or
More Past
Due
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
90+ Days
Past Due
and Still
Accruing
|
|
|
Nonaccrual
Loans
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
227
|
|
|
$
|
227
|
|
|
$
|
25,248
|
|
|
$
|
25,475
|
|
|
$
|
0
|
|
|
$
|
226
|
|
Farmland
|
|
|
188
|
|
|
|
0
|
|
|
|
308
|
|
|
|
496
|
|
|
|
32,857
|
|
|
|
33,353
|
|
|
|
0
|
|
|
|
3,610
|
|
Residential
|
|
|
395
|
|
|
|
334
|
|
|
|
710
|
|
|
|
1,439
|
|
|
|
197,681
|
|
|
|
199,120
|
|
|
|
0
|
|
|
|
1,211
|
|
Commercial mortgage
|
|
|
0
|
|
|
|
0
|
|
|
|
194
|
|
|
|
194
|
|
|
|
125,467
|
|
|
|
125,661
|
|
|
|
0
|
|
|
|
194
|
|
Non-Real
Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & agricultural
|
|
|
70
|
|
|
|
0
|
|
|
|
23
|
|
|
|
93
|
|
|
|
25,579
|
|
|
|
25,672
|
|
|
|
0
|
|
|
|
94
|
|
Consumer & other
|
|
|
2
|
|
|
|
24
|
|
|
|
0
|
|
|
|
26
|
|
|
|
15,564
|
|
|
|
15,590
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
655
|
|
|
$
|
358
|
|
|
$
|
1,462
|
|
|
$
|
2,475
|
|
|
$
|
422,396
|
|
|
$
|
424,871
|
|
|
$
|
0
|
|
|
$
|
5,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
|
|
|
$
|
|
|
|
$
|
390
|
|
|
$
|
390
|
|
|
$
|
26,074
|
|
|
$
|
26,464
|
|
|
$
|
|
|
|
$
|
647
|
|
Farmland
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
343
|
|
|
|
33,188
|
|
|
|
33,531
|
|
|
|
|
|
|
|
3,310
|
|
Residential
|
|
|
413
|
|
|
|
48
|
|
|
|
19
|
|
|
|
480
|
|
|
|
186,708
|
|
|
|
187,188
|
|
|
|
|
|
|
|
31
|
|
Commercial mortgage
|
|
|
25
|
|
|
|
227
|
|
|
|
426
|
|
|
|
678
|
|
|
|
127,837
|
|
|
|
128,515
|
|
|
|
|
|
|
|
640
|
|
Non-Real
Estate Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & agricultural
|
|
|
67
|
|
|
|
|
|
|
|
25
|
|
|
|
92
|
|
|
|
25,994
|
|
|
|
26,086
|
|
|
|
|
|
|
|
31
|
|
Consumer & other
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
11
|
|
|
|
10,173
|
|
|
|
10,184
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
853
|
|
|
$
|
281
|
|
|
$
|
860
|
|
|
$
|
1,994
|
|
|
$
|
409,974
|
|
|
$
|
411,968
|
|
|
$
|
|
|
|
$
|
4,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
A
loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may
be collectively evaluated for impairment.
Non-homogenous
impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral
dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic
conditions. Management considers third-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent
fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments
are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan
losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.
67
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Impaired Loans, continued
As of December 31, 2017 and December 31, 2016, respectively, the recorded investment in impaired loans totaled $12.3 million and
$13.3 million. The total amount of collateral-dependent impaired loans at December 31, 2017 and December 31, 2016, respectively, was $3.7 million and $4.0 million. As of December 31, 2017 and December 31, 2016,
respectively, $3.7 million and $4.4 million of the recorded investment in impaired loans did not have a related allowance. The Bank had $8.6 million and $10.0 million in troubled debt restructured loans included in impaired loans
at December 31, 2017 and December 31, 2016, respectively.
The categories of
non-accrual
loans and
impaired loans overlap, although they are not coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on
non-accrual
status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.
In 2015, management began collectively evaluating performing TDRs with a loan balance of $250,000 or less for impairment. As of December 31, 2017 and
December 31, 2016, respectively, $5.7 million and $6.1 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have $303 thousand and $315 thousand of related allowance.
The following table is a summary of information related to impaired loans as of December 31, 2017 and December 31, 2016:
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Recorded
Investment
1
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Farmland
|
|
|
3,422
|
|
|
|
3,456
|
|
|
|
0
|
|
|
|
3,774
|
|
|
|
10
|
|
Residential
|
|
|
300
|
|
|
|
300
|
|
|
|
0
|
|
|
|
300
|
|
|
|
8
|
|
Commercial mortgage
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial & agricultural
|
|
|
0
|
|
|
|
26
|
|
|
|
0
|
|
|
|
27
|
|
|
|
0
|
|
Consumer & other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,722
|
|
|
|
3,782
|
|
|
|
0
|
|
|
|
4,101
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
361
|
|
|
|
361
|
|
|
|
16
|
|
|
|
718
|
|
|
|
111
|
|
Farmland
|
|
|
1,936
|
|
|
|
1,936
|
|
|
|
58
|
|
|
|
2,224
|
|
|
|
135
|
|
Residential
|
|
|
5,647
|
|
|
|
5,832
|
|
|
|
284
|
|
|
|
6,209
|
|
|
|
290
|
|
Commercial mortgage
|
|
|
602
|
|
|
|
737
|
|
|
|
33
|
|
|
|
1,020
|
|
|
|
54
|
|
Commercial & agricultural
|
|
|
55
|
|
|
|
55
|
|
|
|
3
|
|
|
|
89
|
|
|
|
13
|
|
Consumer & other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
8,601
|
|
|
|
8,921
|
|
|
|
394
|
|
|
|
10,262
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
361
|
|
|
|
361
|
|
|
|
16
|
|
|
|
718
|
|
|
|
111
|
|
Farmland
|
|
|
5,358
|
|
|
|
5,392
|
|
|
|
58
|
|
|
|
5,998
|
|
|
|
145
|
|
Residential
|
|
|
5,947
|
|
|
|
6,132
|
|
|
|
284
|
|
|
|
6,509
|
|
|
|
298
|
|
Commercial mortgage
|
|
|
602
|
|
|
|
737
|
|
|
|
33
|
|
|
|
1,020
|
|
|
|
54
|
|
Commercial & agricultural
|
|
|
55
|
|
|
|
81
|
|
|
|
3
|
|
|
|
116
|
|
|
|
13
|
|
Consumer & other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,323
|
|
|
$
|
12,703
|
|
|
$
|
394
|
|
|
$
|
14,363
|
|
|
$
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Recorded investment is the loan balance, net of any charge-offs
|
68
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Impaired Loans, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Recorded
Investment
1
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
$
|
581
|
|
|
$
|
581
|
|
|
$
|
|
|
|
$
|
840
|
|
|
$
|
17
|
|
Farmland
|
|
|
3,660
|
|
|
|
3,660
|
|
|
|
|
|
|
|
4,170
|
|
|
|
18
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
10
|
|
Commercial mortgage
|
|
|
114
|
|
|
|
114
|
|
|
|
|
|
|
|
115
|
|
|
|
4
|
|
Commercial & agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,355
|
|
|
|
4,355
|
|
|
|
|
|
|
|
5,472
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
193
|
|
|
|
193
|
|
|
|
10
|
|
|
|
201
|
|
|
|
16
|
|
Farmland
|
|
|
1,679
|
|
|
|
1,679
|
|
|
|
73
|
|
|
|
1,705
|
|
|
|
84
|
|
Residential
|
|
|
6,138
|
|
|
|
6,300
|
|
|
|
423
|
|
|
|
6,629
|
|
|
|
302
|
|
Commercial mortgage
|
|
|
838
|
|
|
|
974
|
|
|
|
44
|
|
|
|
1,035
|
|
|
|
39
|
|
Commercial & agricultural
|
|
|
113
|
|
|
|
113
|
|
|
|
6
|
|
|
|
155
|
|
|
|
9
|
|
Consumer & other
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
8,965
|
|
|
|
9,263
|
|
|
|
556
|
|
|
|
9,735
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
774
|
|
|
|
774
|
|
|
|
10
|
|
|
|
1,041
|
|
|
|
33
|
|
Farmland
|
|
|
5,339
|
|
|
|
5,339
|
|
|
|
73
|
|
|
|
5,875
|
|
|
|
102
|
|
Residential
|
|
|
6,138
|
|
|
|
6,300
|
|
|
|
423
|
|
|
|
6,976
|
|
|
|
312
|
|
Commercial mortgage
|
|
|
952
|
|
|
|
1,088
|
|
|
|
44
|
|
|
|
1,150
|
|
|
|
43
|
|
Commercial & agricultural
|
|
|
113
|
|
|
|
113
|
|
|
|
6
|
|
|
|
155
|
|
|
|
9
|
|
Consumer & other
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
10
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,320
|
|
|
$
|
13,618
|
|
|
$
|
556
|
|
|
$
|
15,207
|
|
|
$
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Recorded investment is the loan balance, net of any charge-offs
|
Troubled Debt Restructuring
A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrowers financial difficulties, grants a concession to the
borrower that the Bank would not otherwise consider.
The loan terms which have been modified or restructured due to a borrowers financial
difficulty, include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or
re-aging,
extensions, deferrals and renewals. Troubled debt restructured loans are considered impaired loans.
69
Notes to Consolidated Financial Statements
Note 6. Allowance for Loan Losses and Impaired Loans, continued
Troubled Debt Restructuring, continued
The following table sets forth information with respect to the Banks troubled debt restructurings as of
December 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
TDRs identified during the period
|
|
|
TDRs identified in the last twelve
months that subsequently defaulted
(1)
|
|
|
|
Number
of
contracts
|
|
|
Pre-
modification
outstanding
recorded
investment
|
|
|
Post-
modification
outstanding
recorded
investment
|
|
|
Number
of
contracts
|
|
|
Pre-
modification
outstanding
recorded
investment
|
|
|
Post-
modification
outstanding
recorded
investment
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Farmland
|
|
|
2
|
|
|
|
298
|
|
|
|
298
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential
|
|
|
1
|
|
|
|
48
|
|
|
|
48
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial mortgage
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial & agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer & other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
$
|
346
|
|
|
$
|
346
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve months ended December 31, 2017, three loans were modified that were considered to be TDRs. Term
concessions only were granted and no additional funds were advanced.
(1)
|
Loans past due 30 days or more are considered to be in default.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
TDRs identified during the period
|
|
|
TDRs identified in the last twelve
months that subsequently defaulted
(1)
|
|
|
|
Number
of
contracts
|
|
|
Pre-
modification
outstanding
recorded
investment
|
|
|
Post-
modification
outstanding
recorded
investment
|
|
|
Number
of
contracts
|
|
|
Pre-
modification
outstanding
recorded
investment
|
|
|
Post-
modification
outstanding
recorded
investment
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction & development
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Farmland
|
|
|
2
|
|
|
|
144
|
|
|
|
150
|
|
|
|
2
|
|
|
|
144
|
|
|
|
150
|
|
Residential
|
|
|
5
|
|
|
|
565
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7
|
|
|
$
|
709
|
|
|
$
|
738
|
|
|
|
2
|
|
|
$
|
144
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve months ended December 31, 2016, seven loans were modified that were considered to be TDRs. Term
concessions only were granted for seven loans, and additional funds were advanced on two loans to pay real estate taxes, personal taxes, and closing cost. Additional funds were advanced on one loan to pay for equipment repairs.
(1)
|
Loans past due 30 days or more are considered to be in default.
|
70
Notes to Consolidated Financial Statements
Note 7. Property and Equipment
Components of property and equipment and total accumulated depreciation at December 31, 2017 and 2016, are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Land
|
|
$
|
4,267
|
|
|
$
|
4,145
|
|
Buildings and improvements
|
|
|
14,950
|
|
|
|
14,668
|
|
Furniture and equipment
|
|
|
10,213
|
|
|
|
9,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,430
|
|
|
|
28,447
|
|
|
|
|
Less accumulated depreciation
|
|
|
(11,784
|
)
|
|
|
(10,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,646
|
|
|
$
|
17,970
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2017 and 2016 amounted to $1,315 thousand and
$883 thousand respectively.
Note 8. Cash Value of Life Insurance
The Bank is owner and beneficiary of life insurance policies on certain employees and directors. Policy cash values totaled approximately $17.3 million,
and $16.9 million at December 31, 2017 and 2016, respectively.
Note 9. Intangible Assets
The following table presents the gross carrying amount and accumulated amortization for the Companys core deposit intangible assets, which are the only
identifiable intangible assets subject to amortization. Core deposit intangibles at December 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Gross carrying amount
|
|
$
|
2,469
|
|
|
$
|
2,469
|
|
Accumulated amortization
|
|
|
424
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
2,045
|
|
|
$
|
2,327
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2017 and 2016 amounted to $282 thousand and $142 thousand respectively.
Note 10. Deposits
The aggregate amount of time
deposits in denominations of more than $250 thousand at December 31, 2017 and 2016 was $13.5 million, and $12.5 million, respectively. At December 31, 2017, the scheduled maturities of all time deposits are as follows:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
2018
|
|
$
|
63,799
|
|
2019
|
|
|
25,183
|
|
2020
|
|
|
21,044
|
|
2021
|
|
|
22,112
|
|
2022
|
|
|
15,587
|
|
|
|
|
|
|
Total
|
|
$
|
147,725
|
|
|
|
|
|
|
Note 11. Short-Term Debt
At December 31, 2017 and 2016 the Bank had no debt outstanding classified as short-term.
At December 31, 2017, the Bank had established unsecured lines of credit of approximately $28.0 million with correspondent banks to provide
additional liquidity if, and as needed. In addition, the Bank has the ability to borrow up to approximately $136.5 million from the Federal Home Loan Bank, subject to the pledging of collateral.
Note 12. Long-Term Debt
At December 31, 2017 and
2016 the Bank had no debt outstanding classified as long-term.
71
Notes to Consolidated Financial Statements
Note 13. Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value of future cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the
instruments. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Companys financial instruments as of
December 31, 2017 and December 31, 2016. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a
reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits,
the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
(dollars in thousands)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial InstrumentsAssets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
421,418
|
|
|
$
|
417,229
|
|
|
$
|
0
|
|
|
$
|
416,426
|
|
|
$
|
803
|
|
|
|
|
|
|
|
Financial Instruments Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
|
147,725
|
|
|
|
144,656
|
|
|
|
0
|
|
|
|
144,656
|
|
|
|
0
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial InstrumentsAssets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
408,548
|
|
|
$
|
405,876
|
|
|
$
|
|
|
|
$
|
405,410
|
|
|
$
|
466
|
|
|
|
|
|
|
|
Financial Instruments Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
|
|
|
167,355
|
|
|
|
165,257
|
|
|
|
|
|
|
|
165,257
|
|
|
|
|
|
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine
fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as
loans or foreclosed assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
72
Notes to Consolidated Financial Statements
Note 13. Financial Instruments, continued
Fair Value Hierarchy
Under FASB ASC 820, Fair Value Measurements and Disclosures, the Company groups assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of option pricing models, discounted cash flow models and similar
techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If
quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active
over-the-counter
markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and
corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. If a loan is identified as individually impaired,
management measures impairment in accordance with applicable accounting guidance. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation
value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2017, a small
percentage of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with accounting standards, impaired loans where an allowance is established based on the fair value of collateral require classification
in the fair value hierarchy. When the fair value of the collateral is based on an observable market price the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on either an external or internal appraisal
and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Derivative Assets and Liabilities
Derivative instruments held or issued by the Company for risk management purposes are traded in
over-the-counter
markets where quoted market prices are not readily available. Management engages third-party intermediaries to determine the fair market value of these derivative instruments and classifies
these instruments as Level 2. Examples of Level 2 derivatives are interest rate swaps, caps and floors. No derivative instruments were held during the years ended December 31, 2017 or 2016.
73
Notes to Consolidated Financial Statements
Note 13. Financial Instruments, continued
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable
market price the Company records the foreclosed asset as nonrecurring Level 2. When the fair value of the collateral is based on either an external or internal appraisal and there is no observable market price, the Company records the
foreclosed asset as nonrecurring Level 3.
Assets Recorded at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
28,154
|
|
|
$
|
0
|
|
|
$
|
28,154
|
|
|
$
|
0
|
|
Corporate securities
|
|
|
2,936
|
|
|
|
0
|
|
|
|
2,936
|
|
|
|
0
|
|
State and municipal securities
|
|
|
19,585
|
|
|
|
0
|
|
|
|
19,585
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
50,675
|
|
|
$
|
0
|
|
|
$
|
50,675
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
2,209
|
|
|
$
|
|
|
|
$
|
2,209
|
|
|
$
|
|
|
Mortgage-backed securities
|
|
|
35,202
|
|
|
|
|
|
|
|
35,202
|
|
|
|
|
|
Corporate securities
|
|
|
2,974
|
|
|
|
|
|
|
|
2,974
|
|
|
|
|
|
State and municipal securities
|
|
|
22,155
|
|
|
|
|
|
|
|
22,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
62,540
|
|
|
$
|
|
|
|
$
|
62,540
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No liabilities were recorded at fair value on a recurring basis as of December 31, 2017 or 2016. There were no
significant transfers between levels during the years ended December 31, 2017 or 2016.
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with
U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value
on a nonrecurring basis at December 31, 2017 or 2016. Assets measured at fair value on a nonrecurring basis are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
803
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
803
|
|
Foreclosed assets
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
803
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Notes to Consolidated Financial Statements
Note 13. Financial Instruments, continued
Assets Recorded at Fair Value on a Nonrecurring Basis, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
466
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
466
|
|
Foreclosed assets
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
536
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Level 3 assets measured at fair value on a recurring or
non-recurring
basis as
of December 31, 2017 and 2016, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
December 31,
2017
|
|
|
Fair Value at
December 31,
2016
|
|
|
Valuation Technique
|
|
Significant
Unobservable
Inputs
|
|
General Range
of Significant
Unobservable
Input Values
|
|
Impaired Loans
|
|
$
|
803
|
|
|
$
|
466
|
|
|
Appraised
Value/Discounted Cash
Flows/Market
Value of Note
|
|
Discounts to reflect
current market
conditions, ultimate
collectability, and
estimated costs
to
sell
|
|
|
0 10
|
%
|
|
|
|
|
|
|
Other Real Estate Owned
|
|
$
|
0
|
|
|
$
|
70
|
|
|
Appraised
Value/Comparable
Sales/Other
Estimates
from Independent
Sources
|
|
Discounts to reflect
current market
conditions and
estimated costs to
sell
|
|
|
0 10
|
%
|
Note 14. Employee Benefit Plans
Prior to the merger, both Grayson National Bank (Grayson) and Bank of Floyd (Floyd) had qualified noncontributory defined benefit pension plans in place which
covered substantially all of each banks employees. The benefits in each plan are primarily based on years of service and earnings. Both Grayson and Floyd plans were amended to freeze benefit accruals for all eligible employees prior to the
effective date of the merger. A summary of each plan follows:
Grayson Plan
The following is a summary of the plans funded status as of December 31:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
4,783
|
|
|
$
|
4,645
|
|
Interest cost
|
|
|
191
|
|
|
|
196
|
|
Actuarial (gain) loss
|
|
|
637
|
|
|
|
227
|
|
Benefits paid
|
|
|
(380
|
)
|
|
|
(306
|
)
|
Settlement (gain) loss
|
|
|
(8)
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
5,223
|
|
|
|
4,783
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
7,894
|
|
|
|
7,722
|
|
Actual return on plan assets
|
|
|
999
|
|
|
|
478
|
|
Benefits paid
|
|
|
(380)
|
|
|
|
(306)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
8,513
|
|
|
|
7,894
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
$
|
3,290
|
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
75
Notes to Consolidated Financial Statements
Note 14. Employee Benefit Plans, continued
Grayson Plan, continued
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Amounts recognized in the Balance Sheet
|
|
|
|
|
|
|
|
|
Plan benefit cost
|
|
$
|
4,539
|
|
|
$
|
4,292
|
|
Unrecognized net actuarial loss
|
|
|
(1,249
|
)
|
|
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
Amount recognized in other assets
|
|
$
|
3,290
|
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss
|
|
$
|
(1,249
|
)
|
|
$
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
262
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in accumulated comprehensive income (loss), net
|
|
$
|
(987
|
)
|
|
$
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
Prepaid benefit detail
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
$
|
(5,223
|
)
|
|
$
|
(4,783
|
)
|
Fair value of assets
|
|
|
8,513
|
|
|
|
7,894
|
|
Unrecognized net actuarial loss
|
|
|
1,249
|
|
|
|
1,181
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
|
4,539
|
|
|
|
4,292
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
191
|
|
|
$
|
196
|
|
Expected return on plan assets
|
|
|
(552
|
)
|
|
|
(558
|
)
|
Recognized net loss due to settlement
|
|
|
86
|
|
|
|
57
|
|
Recognized net actuarial loss
|
|
|
28
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
|
(247)
|
|
|
|
(295)
|
|
|
|
|
|
|
|
|
|
|
Additional disclosure information
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
5,223
|
|
|
$
|
4,783
|
|
Vested benefit obligation
|
|
$
|
5,223
|
|
|
$
|
4,783
|
|
Discount rate used for net periodic pension cost
|
|
|
4.00
|
%
|
|
|
4.25
|
%
|
Discount rate used for disclosure
|
|
|
3.50
|
%
|
|
|
4.00
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.25
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
Average remaining service (years)
|
|
|
13
|
|
|
|
14
|
|
Using the same fair value hierarchy described in Note 11, the fair values of the Companys pension plan assets, by asset
category, are as follows:
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and short term investments
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds equities
|
|
|
4,368
|
|
|
|
4,368
|
|
|
|
0
|
|
|
|
0
|
|
Mutual funds fixed income
|
|
|
4,145
|
|
|
|
4,145
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
8,513
|
|
|
$
|
8,513
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and short term investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mutual funds equities
|
|
|
3,969
|
|
|
|
3,969
|
|
|
|
|
|
|
|
|
|
Mutual funds fixed income
|
|
|
3,925
|
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
7,894
|
|
|
$
|
7,894
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Notes to Consolidated Financial Statements
Note 14. Employee Benefit Plans, continued
Grayson Plan, continued
Estimated Future Benefit Payments
|
|
|
|
|
(dollars in thousands)
|
|
Pension
Benefits
|
|
2018
|
|
$
|
568
|
|
2019
|
|
|
49
|
|
2020
|
|
|
16
|
|
2021
|
|
|
123
|
|
2022
|
|
|
225
|
|
2023 2027
|
|
|
2,689
|
|
|
|
|
|
|
|
|
$
|
3,670
|
|
|
|
|
|
|
Funding Policy
It
has been Bank practice to contribute the maximum
tax-deductible
amount each year as determined by the plan administrator. As a result of prior year contributions exceeding the minimum requirements, a
Prefunding Balance existed as of December 31, 2017 and there is no required contribution for 2018. Based on this we do not anticipate making a contribution to the plan in 2018.
Long-Term Rate of Return
The plan sponsor selects
the expected long-term
rate-of-return-on-assets
assumption in consultation with their
investment advisors and actuary. This rate is 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 during which the 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).
Asset Allocation
The pension plans weighted-average asset allocations at December 31, 2017 and 2016, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Mutual funds fixed income
|
|
|
49
|
%
|
|
|
50
|
%
|
Mutual funds equity
|
|
|
51
|
%
|
|
|
50
|
%
|
Cash and equivalents
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
77
Notes to Consolidated Financial Statements
Note 14. Employee Benefit Plans, continued
Grayson Plan, continued
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of
50 percent fixed income and 50 percent equities. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the
Plans investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
It is the responsibility of the Trustee to administer the investments of the Trust within reasonable costs, being careful to avoid sacrificing quality. These
costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the Trust.
Floyd Plan
The Company participates in the
Pentegra Defined Benefit Plan for Financial Institutions (The Pentegra DB Plan), a
tax-qualified
defined-benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting
purposes and is a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413 (C) and, as a result, all of the assets stand behind all of the liabilities.
Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.
Funded Status (market value of plan assets divided by funding target) as of July
1
,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Valuation
|
|
|
Valuation
|
|
Source
|
|
Report
|
|
|
Report
|
|
Bank of Floyd Plan
|
|
|
108.63
|
%
|
|
|
109.78
|
%
|
Employer Contributions
Plan expenses paid by the Company totaled approximately $58 thousand and $56 thousand for the years ended December 31, 2017 and 2016,
respectively.
Note 15. Deferred Compensation and Supplemental Executive Retirement Plans
Deferred compensation plans have been adopted for certain executive officers and members of the Board of Directors for future compensation upon retirement.
Under plan provisions aggregate annual payments ranging from $1,992 to $37,200 are payable for ten years certain, generally beginning at age 65. Reduced benefits apply in cases of early retirement or death prior to the benefit date, as defined.
Liability accrued for compensation deferred under the plan amounts to $312 thousand and $362 thousand at December 31, 2017 and 2016 respectively. Expense charged against income and included in salary and benefits expense was
$27 thousand and $31 thousand in 2017 and 2016, respectively. Charges to income are based on changes in present value of future cash payments, discounted at 8 percent, consistent with prior years. Supplemental executive retirement
plans for certain executive officers were adopted in 2017. The plans provide for annual payments ranging from $55,000 to $90,000, payable in monthly installments, and continuing for the life of the executive. Reduced benefits apply in cases of early
retirement. Expense charged against income and included in salary and benefits expense in 2017 totaled $36 thousand for these supplemental executive retirement plans.
Prior to the merger, the Bank of Floyd had adopted supplemental executive plans to provide benefits for two former members of management. Aggregate annual
payments of $69 thousand are payable for 20 years, beginning subsequent to the executives last day of employment. The liability is calculated by discounting the anticipated future cash flows at 4.00%. The liability accrued for this
obligation was $805 thousand at December 31, 2017. Charges to income amounted to approximately $32 thousand and $17 thousand in 2017 and 2016 respectively. These plans are unfunded, however, life insurance has been acquired in
amounts sufficient to discharge the obligations of the agreements.
78
Notes to Consolidated Financial Statements
Note 16. Income Taxes
Current and Deferred Income Tax Components
The
components of income tax expense (benefit) (substantially all Federal) are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Current
|
|
$
|
213
|
|
|
$
|
21
|
|
Deferred
|
|
|
2,891
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,104
|
|
|
$
|
1,175
|
|
|
|
|
|
|
|
|
|
|
Rate Reconciliation
A reconciliation of income tax expense computed at the statutory federal income tax rate to income tax expense (benefit) included in the statements of income
follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Tax at statutory federal rate
|
|
$
|
1,881
|
|
|
$
|
1,222
|
|
Tax exempt interest income
|
|
|
(61
|
)
|
|
|
(33
|
)
|
Tax exempt insurance income
|
|
|
(151
|
)
|
|
|
(163
|
)
|
State income tax, net of federal benefit
|
|
|
9
|
|
|
|
16
|
|
Merger expenses
|
|
|
4
|
|
|
|
205
|
|
Bargain purchase gain
|
|
|
0
|
|
|
|
(303
|
)
|
Merger related NOL adjustment
|
|
|
0
|
|
|
|
225
|
|
Other
|
|
|
(13
|
)
|
|
|
6
|
|
Deferred tax asset
re-measurement
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,104
|
|
|
$
|
1,175
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Analysis
The significant components of net deferred tax assets (all Federal) at December 31, 2017 and 2016 are summarized as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
482
|
|
|
$
|
652
|
|
Acquired loan credit mark
|
|
|
842
|
|
|
|
1,710
|
|
Deferred compensation
|
|
|
335
|
|
|
|
569
|
|
Investment impairment charge recorded directly to stockholders equity as a component of
other comprehensive income
|
|
|
19
|
|
|
|
497
|
|
Minimum pension liability
|
|
|
262
|
|
|
|
402
|
|
Net operating loss carryforward
|
|
|
2,131
|
|
|
|
4,227
|
|
Alternative minimum tax credit carryforward
|
|
|
638
|
|
|
|
394
|
|
Net unrealized losses on securities available for sale
|
|
|
139
|
|
|
|
296
|
|
Nonaccrual interest income
|
|
|
217
|
|
|
|
358
|
|
Other
|
|
|
76
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,141
|
|
|
$
|
9,305
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan origination costs
|
|
|
228
|
|
|
|
288
|
|
Core deposit intangible
|
|
|
433
|
|
|
|
798
|
|
Accrued pension costs
|
|
|
962
|
|
|
|
1,471
|
|
Depreciation
|
|
|
553
|
|
|
|
875
|
|
Accretion of discount on investment securities, net
|
|
|
0
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,176
|
|
|
$
|
3,433
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,965
|
|
|
$
|
5,872
|
|
|
|
|
|
|
|
|
|
|
79
Notes to Consolidated Financial Statements
Note 16. Income Taxes, continued
On December 22, 2017, the Tax Cuts and Jobs Act was signed into legislation, lowering the corporate
income tax rate to 21% effective January 1, 2018 and making many other significant changes to the US income tax code. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is
enacted. As a result, the Companys income tax expense for the year ended December 31, 2017 includes tax expense from the
re-measurement
of deferred assets and liabilities totaling $1.4 million.
The Bank has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax
positions in accordance with applicable regulations. Tax returns for the years subsequent to 2014 remain subject to examination by both federal and state tax authorities.
Deferred tax assets or liabilities are initially recognized for differences between the financial statement carrying amount and the tax basis of assets and
liabilities which will result in future deductible or taxable amounts and operating loss and tax credit carry-forwards. A valuation allowance is then established, as applicable, to reduce the deferred tax asset to the level at which it is more
likely than not that the tax benefits will be realized. Sources of taxable income that may allow for the realization of tax benefits include (1) taxable income in the current year or prior years that is available through carry-back,
(2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) taxable income generated by future operations. There is no valuation allowance for deferred tax assets as of December 31,
2017 and 2016. The net operating loss of approximately $10.1 million, if not utilized prior to, will begin to expire in 2031. It is managements belief that realization of the deferred tax asset is more likely than not.
Note 17. Commitments and Contingencies
Litigation
In the normal course of business the Bank is involved in various legal proceedings. After consultation with legal counsel, management believes
that any liability resulting from such proceedings will not be material to the consolidated financial statements.
Financial Instruments with
Off-Balance
Sheet Risk
The Bank is party to 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. These
instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets.
The Banks exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as for
on-balance
sheet instruments. A summary of the Banks commitments at December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Commitments to extend credit
|
|
$
|
56,912
|
|
|
$
|
54,667
|
|
Standby letters of credit
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,018
|
|
|
$
|
54,667
|
|
|
|
|
|
|
|
|
|
|
80
Notes to Consolidated Financial Statements
Note 17. Commitments and Contingencies , continued
Financial Instruments with
Off-Balance
Sheet Risk, continued
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a
case-by-case
basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential
real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees 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 loan
facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.
Concentrations of
Credit Risk
Substantially all of the Banks loans, commitments to extend credit, and standby letters of credit have been granted to customers
in the Banks market area and such customers are generally depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Banks market area. The concentrations of credit by type
of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Banks primary focus is toward
small business and consumer transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers in excess of $5,000,000. The Bank has cash and cash equivalents on deposit with
financial institutions which exceed federally insured limits.
Note 18. Regulatory Restrictions
Dividends
The Companys dividend payments are
generally made from dividends received from the Bank. Under applicable federal law, the Comptroller of the Currency restricts national bank total dividend payments in any calendar year to net profits of that year, as defined, combined with retained
net profits for the two preceding years. The Comptroller also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in an unsafe or unsound practice in conducting its business. It is possible, under
certain circumstances, the Comptroller could assert that dividends or other payments would be an unsafe or unsound practice.
Intercompany
Transactions
The Banks legal lending limit on loans to the Company is governed by Federal Reserve Act 23A, and differs from legal lending
limits on loans to external customers. Generally, a bank may lend up to 10 percent of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have
a market value when the loan is made of at least 20 percent more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10 percent more than the amount
of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for
collateral in excess of the loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $5.7 million at December 31, 2017. No 23A transactions were deemed to exist between
the Company and the Bank at December 31, 2017.
81
Notes to Consolidated Financial Statements
Note 18. Regulatory Restrictions, continued
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain
off-balance
sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Effective January 1, 2015, the federal banking regulators adopted rules to implement the Basel III regulatory capital reforms from the Basel Committee on
Banking Supervision and certain provisions of the Dodd-Frank Act. The final rules required the Bank to comply with the following new minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets;
(ii) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the prior requirement of 4%); (iii) a total capital ratio of 8% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4% of
total assets (unchanged from the prior requirement). When fully phased in on January 1, 2019, the rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at
least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least
7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio
as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount
each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets
above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The rules also revised the prompt corrective action regulations pursuant to Section 38 of the FDIA by (i) introducing a common equity
Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the
minimum ratio for well-capitalized status being 8.0% (as compared to the prior ratio of 6.0%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage
ratio and still be well-capitalized. These new thresholds were effective for the Bank as of January 1, 2015. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum leverage ratio (5.0%) for well-capitalized
status were unchanged by the final rules.
The new capital requirements also included changes in the risk weights of assets to better reflect credit risk
and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and nonresidential mortgage loans that are 90 days past due or otherwise on
nonaccrual status, a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancelable, a 250% risk weight (up from 100%) for mortgage servicing
rights and deferred tax assets that are not deducted from capital, and increased risk-weights (from 0% to up to 600%) for equity exposures.
82
Notes to Consolidated Financial Statements
Note 18. Regulatory Restrictions, continued
Capital Requirements, continued
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve
Boards Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Banks actual capital amounts and ratios are presented in the following table as of
December 31, 2017 and 2016. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
To Be Well-
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
56,962
|
|
|
|
13.14
|
%
|
|
$
|
34,688
|
|
|
|
8.00
|
%
|
|
$
|
43,360
|
|
|
|
10.00
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
53,483
|
|
|
|
12.33
|
%
|
|
$
|
26,016
|
|
|
|
6.00
|
%
|
|
$
|
34,688
|
|
|
|
8.00
|
%
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
53,483
|
|
|
|
12.33
|
%
|
|
$
|
19,512
|
|
|
|
4.50
|
%
|
|
$
|
28,184
|
|
|
|
6.50
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to average total assets)
|
|
$
|
53,483
|
|
|
|
9.81
|
%
|
|
$
|
21,808
|
|
|
|
4.00
|
%
|
|
$
|
27,260
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
53,657
|
|
|
|
12.72
|
%
|
|
$
|
33,744
|
|
|
|
8.00
|
%
|
|
$
|
42,180
|
|
|
|
10.00
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
50,111
|
|
|
|
11.88
|
%
|
|
$
|
25,308
|
|
|
|
6.00
|
%
|
|
$
|
33,744
|
|
|
|
8.00
|
%
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk weighted assets)
|
|
$
|
50,111
|
|
|
|
11.88
|
%
|
|
$
|
18,981
|
|
|
|
4.50
|
%
|
|
$
|
27,417
|
|
|
|
6.50
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to average total assets)
|
|
$
|
50,111
|
|
|
|
9.01
|
%
|
|
$
|
22,242
|
|
|
|
4.00
|
%
|
|
$
|
27,803
|
|
|
|
5.00
|
%
|
Note 19. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant stockholders and their affiliates (related parties). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features.
Aggregate 2017 and 2016 loan transactions with related parties were as
follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Balance, beginning
|
|
$
|
5,112
|
|
|
$
|
1,741
|
|
New loans
|
|
|
1,388
|
|
|
|
841
|
|
Repayments
|
|
|
(1,228
|
)
|
|
|
(695
|
)
|
Change in relationship
|
|
|
(503
|
)
|
|
|
3,225
|
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
4,769
|
|
|
$
|
5,112
|
|
|
|
|
|
|
|
|
|
|
The Company has accepted deposits during the ordinary course of business from certain directors and executive officers of the
Company and from their affiliates and associates. The total amount of these deposits outstanding was $10.7 million, and $9.5 million at December 31, 2017 and 2016, respectively.
83
Notes to Consolidated Financial Statements
Note 20. Parent Company Financial Information
Condensed financial information of Parkway Acquisition Corp. is presented as follows:
Balance Sheets
December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
1,518
|
|
|
$
|
1,621
|
|
Investment in affiliate bank
|
|
|
55,115
|
|
|
|
53,168
|
|
Other assets
|
|
|
586
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,219
|
|
|
$
|
55,466
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
37
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
0
|
|
|
|
|
|
Surplus
|
|
|
26,166
|
|
|
|
26,166
|
|
Retained earnings
|
|
|
32,526
|
|
|
|
30,654
|
|
Accumulated other comprehensive loss
|
|
|
(1,510
|
)
|
|
|
(1,354
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
57,182
|
|
|
|
55,466
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
57,219
|
|
|
$
|
55,466
|
|
|
|
|
|
|
|
|
|
|
Statements of Income
For the years ended December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Income
|
|
|
|
|
|
|
|
|
Dividends from affiliate bank
|
|
$
|
803
|
|
|
$
|
573
|
|
Bargain purchase gain
|
|
|
0
|
|
|
|
891
|
|
Other income
|
|
|
1
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Management and professional fees
|
|
|
35
|
|
|
|
56
|
|
Other expenses
|
|
|
36
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Income before tax benefit and equity in undistributed income of affiliate
|
|
|
733
|
|
|
|
1,388
|
|
Federal income tax expense
|
|
|
(161
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed income of affiliate
|
|
|
572
|
|
|
|
1,163
|
|
Equity in undistributed income of affiliate
|
|
|
1,855
|
|
|
|
1,255
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,427
|
|
|
$
|
2,418
|
|
|
|
|
|
|
|
|
|
|
84
Notes to Consolidated Financial Statements
Note 20. Parent Company Financial Information, continued
Statements of Cash Flows
For the years ended December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,427
|
|
|
$
|
2,418
|
|
Adjustments to reconcile net income to net cash provided by operations:
|
|
|
|
|
|
|
|
|
Equity in undistributed income of affiliate
|
|
|
(1,855
|
)
|
|
|
(1,255
|
)
|
Bargain purchase gain
|
|
|
0
|
|
|
|
(891
|
)
|
Change in other assets
|
|
|
91
|
|
|
|
59
|
|
Change in other liabilities
|
|
|
37
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
700
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
0
|
|
|
|
1,002
|
|
Cash received in business combination
|
|
|
0
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
0
|
|
|
|
1,824
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash paid for fractional shares
|
|
|
0
|
|
|
|
(5
|
)
|
Dividends paid
|
|
|
(803
|
)
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(803
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(103
|
)
|
|
|
1,592
|
|
|
|
|
Cash and cash equivalents, beginning
|
|
|
1,621
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
1,518
|
|
|
$
|
1,621
|
|
|
|
|
|
|
|
|
|
|
Note 21. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events
are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are
events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed the events occurring through the date the consolidated financial statements were issued and, other
than what is disclosed below, no subsequent events occurred requiring accrual or disclosure.
On March 1, 2018, Parkway, Skyline, and Great State
Bank, a North Carolina state-chartered bank (GSB) entered into an Agreement and Plan of Merger (the Merger Agreement) under which Parkway will acquire GSB. The Merger Agreement provides that, upon the terms and subject to the
conditions set forth therein, GSB will merge with and into Skyline (the Merger), with Skyline as the surviving bank in the Merger. The Merger Agreement was unanimously approved and adopted by the Board of Directors of each of Parkway and
GSB. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), GSB shareholders will have the right to receive 1.21 shares of the common stock of Parkway for each share of the
common stock of GSB held immediately prior to the Effective Time.
In connection with the execution of the Merger Agreement, all of the directors of GSB
entered into support and
non-competition
agreements with Parkway pursuant to which such individuals, in their capacities as shareholders of GSB, have agreed, among other things, to vote their respective shares
of common stock in favor to the approval of the Merger Agreement and to certain
non-competition
and
non-solicitation
covenants. The Merger Agreement contains customary
representations, warranties and covenants of each of Parkway and Skyline and GSB. The completion of the Merger is subject to various closing conditions, including obtaining the requisite approvals of Parkways and GSBs shareholders and
receiving certain regulatory approvals. GSB has also agreed to customary
non-solicitation
covenants relating to alternative acquisition proposals. The Merger Agreement also provides that, upon termination of
the Merger Agreement under specified circumstances, GSB may be required to pay to Parkway a termination fee of $575,000. The merger is currently expected to close in the third quarter of 2018.
85