Note 4 - Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Note 5 - Goodwill and Other Intangible Assets
Note 6 - Short-Term Borrowings
Note 7 - Long-Term Borrowings
Note 8 - Junior Subordinated Debt
Note 9 - Derivative Financial Instruments and Hedging Activities
Note 10 - Stock Based Compensation
Note 11 - Earnings per Common Share
Note 12 - Employee Benefit Plans
Note 13 - Fair Value of Financial Instruments
Note 14 - Segment and Related Information
Note 15 - Supplemental Cash Flow Information
Note 16 - Accumulated Other Comprehensive Income (Loss)
Note 17 - Proposed Merger
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
amnb-09302018xexhibit311.htm
EX-31.2
amnb-09302018xexhibit312.htm
EX-32.1
amnb-09302018xexhibit321.htm
EX-32.2
amnb-09302018xexhibit322.htm
American National Bankshares Earnings 2018-09-30
AMNB 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 amnb-09302018x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2018.
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 0-12820
AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)
VIRGINIA
54-1284688
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
628 Main Street
Danville, Virginia
24541
(Address of principal executive offices)
(Zip Code)
(434) 792-5111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
At October 26, 2018, the Company had 8,714,431 shares of Common Stock outstanding, $1 par value.
Common stock, $1 par, 20,000,000 shares authorized, 8,714,431 shares outstanding at September 30, 2018 and 8,650,547 shares outstanding at December 31, 2017
8,661
8,604
Capital in excess of par value
77,842
76,179
Retained earnings
138,715
127,010
Accumulated other comprehensive loss, net
(9,152
)
(3,076
)
Total shareholders' equity
216,066
208,717
Total liabilities and shareholders' equity
$
1,806,491
$
1,816,078
(*) - Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
3
American National Bankshares Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share data) (Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Interest and Dividend Income:
Interest and fees on loans
$
15,062
$
14,394
$
44,485
$
40,850
Interest and dividends on securities:
Taxable
1,568
1,108
4,432
3,395
Tax-exempt
362
460
1,204
1,604
Dividends
82
77
240
240
Other interest income
143
235
516
469
Total interest and dividend income
17,217
16,274
50,877
46,558
Interest Expense:
Interest on deposits
2,048
1,529
5,746
4,081
Interest on short-term borrowings
29
52
41
94
Interest on long-term borrowings
—
82
—
243
Interest on junior subordinated debt
389
273
1,008
756
Total interest expense
2,466
1,936
6,795
5,174
Net Interest Income
14,751
14,338
44,082
41,384
Provision for (recovery of) Loan Losses
(23
)
440
(97
)
1,090
Net Interest Income After Provision for Loan Losses
14,774
13,898
44,179
40,294
Noninterest Income:
Trust fees
1,001
1,098
2,875
2,918
Service charges on deposit accounts
605
622
1,809
1,818
Other fees and commissions
656
618
1,977
1,852
Mortgage banking income
551
612
1,492
1,603
Securities gains (losses), net
(17
)
—
393
590
Brokerage fees
172
219
603
603
Income from Small Business Investment Companies
150
86
476
118
Gains on premises and equipment, net
63
337
66
337
Other
199
212
585
584
Total noninterest income
3,380
3,804
10,276
10,423
Noninterest Expense:
Salaries
5,285
5,072
15,377
14,604
Employee benefits
1,036
1,048
3,322
3,229
Occupancy and equipment
1,069
1,151
3,297
3,367
FDIC assessment
134
138
412
401
Bank franchise tax
291
276
863
795
Core deposit intangible amortization
56
80
210
448
Data processing
420
475
1,309
1,464
Software
307
303
966
853
Other real estate owned, net
46
62
101
173
Other
2,260
2,105
6,751
6,528
Total noninterest expense
10,904
10,710
32,608
31,862
Income Before Income Taxes
7,250
6,992
21,847
18,855
Income Taxes
1,465
2,205
4,270
5,726
Net Income
$
5,785
$
4,787
$
17,577
$
13,129
4
Net Income Per Common Share:
Basic
$
0.66
$
0.55
$
2.02
$
1.52
Diluted
$
0.66
$
0.55
$
2.02
$
1.52
Average Common Shares Outstanding:
Basic
8,712,443
8,644,310
8,691,423
8,639,433
Diluted
8,718,918
8,663,246
8,703,662
8,657,891
The accompanying notes are an integral part of the consolidated financial statements.
5
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
Three Months Ended September 30,
2018
2017
Net income
$
5,785
$
4,787
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
(1,965
)
296
Tax effect
440
(104
)
Reclassification adjustment for gains on sales of securities
(73
)
—
Tax effect
16
—
Unrealized gains on cash flow hedges
438
—
Tax effect
(98
)
—
Other comprehensive income (loss)
(1,242
)
192
Comprehensive income
$
4,543
$
4,979
The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
Nine Months Ended September 30,
2018
2017
Net income
$
17,577
$
13,129
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
(7,145
)
2,186
Tax effect
1,626
(765
)
Reclassification adjustment for gains on sales of securities
(81
)
(590
)
Tax effect
18
207
Unrealized gains on cash flow hedges
201
—
Tax effect
(45
)
—
Other comprehensive income (loss)
(5,426
)
1,038
Comprehensive income
$
12,151
$
14,167
The accompanying notes are an integral part of the consolidated financial statements.
6
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands, except per share data) (Unaudited)
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
Balance, December 31, 2016
$
8,578
$
75,076
$
119,600
$
(1,874
)
$
201,380
Net income
—
—
13,129
—
13,129
Other comprehensive income
—
—
—
1,038
1,038
Stock options exercised (4,950 shares)
5
109
—
—
114
Vesting of restricted stock (7,086 shares)
7
(7
)
—
—
—
Equity based compensation (24,344 shares)
10
765
—
—
775
Cash dividends paid, $0.72 per share
—
—
(6,222
)
—
(6,222
)
Balance, September 30, 2017
$
8,600
$
75,943
$
126,507
$
(836
)
$
210,214
Balance, December 31, 2017
$
8,604
$
76,179
$
127,010
$
(3,076
)
$
208,717
Net income
—
—
17,577
—
17,577
Other comprehensive loss
—
—
—
(5,426
)
(5,426
)
Reclassification for ASU 2016-01 adoption
—
—
650
(650
)
—
Stock options exercised (35,310 shares)
35
826
—
—
861
Vesting of restricted stock (10,718 shares)
11
(11
)
—
—
—
Equity based compensation (28,574 shares)
11
848
—
—
859
Cash dividends paid, $0.75 per share
—
—
(6,522
)
—
(6,522
)
Balance, September 30, 2018
$
8,661
$
77,842
$
138,715
$
(9,152
)
$
216,066
The accompanying notes are an integral part of the consolidated financial statements.
7
American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended September 30,
2018
2017
Cash Flows from Operating Activities:
Net income
$
17,577
$
13,129
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses
(97
)
1,090
Depreciation
1,366
1,394
Net accretion of acquisition accounting adjustments
(1,002
)
(1,586
)
Core deposit intangible amortization
210
448
Net amortization of securities
1,262
1,417
Net gain on sale or call of securities available for sale
(81
)
(590
)
Net unrealized holding gains on equity securities
(312
)
—
Gain on sale of loans held for sale
(1,492
)
(1,274
)
Proceeds from sales of loans held for sale
61,772
67,511
Originations of loans held for sale
(60,575
)
(63,627
)
Net (gain) loss on other real estate owned
5
(13
)
Valuation allowance on other real estate owned
28
86
Net gain on sale of premises and equipment
(66
)
(337
)
Equity based compensation expense
859
775
Earnings on bank owned life insurance
(325
)
(328
)
Deferred income tax expense
203
792
Net change in interest receivable
(1
)
299
Net change in other assets
(660
)
(749
)
Net change in interest payable
93
39
Net change in other liabilities
136
(701
)
Net cash provided by operating activities
18,900
17,775
Cash Flows from Investing Activities:
Proceeds from sales of equity securities
431
—
Proceeds from sales of securities available for sale
57,607
55,403
Proceeds from maturities, calls and paydowns of securities available for sale
23,561
39,441
Purchases of securities available for sale
(66,221
)
(19,778
)
Net change in restricted stock
871
715
Net (increase) decrease in loans
5,600
(129,920
)
Proceeds from sale of premises and equipment
233
647
Purchases of premises and equipment
(1,322
)
(2,188
)
Proceeds from sales of other real estate owned
808
387
Net cash provided by (used in) investing activities
21,568
(55,293
)
Cash Flows from Financing Activities:
Net change in demand, money market, and savings deposits
(1,321
)
96,371
Net change in time deposits
(10,298
)
13,194
Net change in customer repurchase agreements
18,378
4,074
Net change in other short-term borrowings
(24,000
)
(20,000
)
Common stock dividends paid
(6,522
)
(6,222
)
Proceeds from exercise of stock options
861
114
Net cash provided by (used in) financing activities
(22,902
)
87,531
Net Increase in Cash and Cash Equivalents
17,566
50,013
Cash and Cash Equivalents at Beginning of Period
52,477
53,207
Cash and Cash Equivalents at End of Period
$
70,043
$
103,220
The accompanying notes are an integral part of the consolidated financial statements.
8
AMERICAN NATIONAL BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Accounting Policies
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank"). The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, unfunded pension liability, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, the valuation of deferred tax assets and liabilities, and the valuation of other real estate owned ("OREO").
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 8.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period. Certain reclassifications have been made to prior period balances to conform to the current period presentation. These reclassifications did not have an impact on net income and were considered immaterial. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amended the guidance on the classification and measurement of financial instruments. Upon adoption of ASU 2016-01, the Company reclassified $650,000 from accumulated other comprehensive loss to retained earnings for the difference in amortized cost and fair value. In 2018, the Company recognized the equity securities fair value change in net income. Previously, the fair value changes were recognized, net of tax, in other comprehensive loss. The adoption of ASU 2016-01 did not have a material effect on the Company's consolidated financial statements.
During the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers", and all subsequent amendments to the ASU (collectively "ASC 606"), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company's revenue is from interest income, including loans and securities, that are outside the scope of the standard. The services that fall within the scope of the standard are presented within noninterest income on the consolidated statement of income and are recognized as revenue as the Company satisfies its obligations to the customer. The revenue that falls within the scope of ASC 606 is primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted
9
upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 ("Codification Improvements to Topic 842, Leases.") and ASU 2018-11 ("Leases (Topic 842): Targeted Improvements.") Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company has analyzed all leases currently in place and determined the adoption of ASU 2016-02 (as amended) will not have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission ("SEC") filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has implemented and completed a significant amount of a project plan with the assistance of an outside vendor. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal
10
years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact that ASU 2018-14 will have on its consolidated financial statements.
Note 2 – Securities
The amortized cost and fair value of investments in debt and equity securities at September 30, 2018 and December 31, 2017 were as follows (dollars in thousands):
September 30, 2018
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Securities available for sale:
Federal agencies and GSEs
$
117,159
$
—
$
4,991
$
112,168
Mortgage-backed and CMOs
104,595
121
3,554
101,162
State and municipal
75,929
287
928
75,288
Corporate
7,151
30
22
7,159
Total securities available for sale
$
304,834
$
438
$
9,495
$
295,777
The Company adopted ASU 2016-01 effective January 1, 2018 and had equity securities with a fair value of $2,087,000 at September 30, 2018 and recognized in income $312,000 of unrealized holding gains in the first nine months of 2018. During the nine months ended September 30, 2018, the Company sold $431,000 in equity securities at fair value.
December 31, 2017
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Securities available for sale:
Federal agencies and GSEs
$
114,246
$
8
$
2,127
$
112,127
Mortgage-backed and CMOs
106,163
293
1,140
105,316
State and municipal
92,711
1,262
347
93,626
Corporate
7,842
234
14
8,062
Equity securities
1,383
823
—
2,206
Total securities available for sale
$
322,345
$
2,620
$
3,628
$
321,337
11
Restricted Stock
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost. The restricted securities are not subject to the investment security classification and are included as a separate line item on the Company's consolidated balance sheets. The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call. The FHLB requires the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at September 30, 2018 and December 31, 2017 was as follows (dollars in thousands):
September 30, 2018
December 31, 2017
FRB stock
$
3,613
$
3,587
FHLB stock
1,626
2,523
Total restricted stock
$
5,239
$
6,110
Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2018. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
Total
Less than 12 Months
12 Months or More
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Federal agencies and GSEs
$
112,168
$
4,991
$
34,414
$
469
$
77,754
$
4,522
Mortgage-backed and CMOs
95,154
3,554
36,050
840
59,104
2,714
State and municipal
51,631
928
38,892
407
12,739
521
Corporate
829
22
—
—
829
22
Total
$
259,782
$
9,495
$
109,356
$
1,716
$
150,426
$
7,779
Federal agencies and GSEs: The unrealized losses on the Company's investment in 25 government sponsored entities ("GSE") securities were caused by interest rate increases. Eighteen of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.
Mortgage-backed securities: The unrealized losses on the Company's investment in 71 GSE mortgage-backed securities were caused by interest rate increases. Thirty-nine of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.
Collateralized Mortgage Obligations: The unrealized losses associated with three private GSE collateralized mortgage obligations ("CMO") were due to normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.
12
State and municipal securities: The unrealized losses on 72 state and municipal securities were caused by interest rate increases. Twenty of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.
Corporate securities: The unrealized losses on two corporate securities were caused by interest rate increases. Both of these two securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.
Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at September 30, 2018, and no impairment has been recognized.
The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2017 (dollars in thousands):
Total
Less than 12 Months
12 Months or More
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Federal agencies and GSEs
$
99,133
$
2,127
$
45,474
$
321
$
53,659
$
1,806
Mortgage-backed and CMOs
90,806
1,140
64,449
533
26,357
607
State and municipal
34,550
347
27,442
159
7,108
188
Corporate
1,529
14
495
5
1,034
9
Total
$
226,018
$
3,628
$
137,860
$
1,018
$
88,158
$
2,610
Other-Than-Temporarily-Impaired Securities
As of September 30, 2018 and December 31, 2017, there were no securities classified as other-than-temporarily impaired.
Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities available for sale during the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
Realized gains (losses):
Gross realized gains
$
237
$
342
Gross realized losses
(164
)
(261
)
Net realized gains
$
73
$
81
Proceeds from sales of securities
$
35,541
$
57,607
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Realized gains (losses):
Gross realized gains
$
—
$
605
Gross realized losses
—
(15
)
Net realized gains
$
—
$
590
Proceeds from sales of securities
$
—
$
55,403
13
Note 3 – Loans
Loans, excluding loans held for sale, at September 30, 2018 and December 31, 2017, were comprised of the following (dollars in thousands):
September 30, 2018
December 31, 2017
Commercial
$
284,176
$
251,666
Commercial real estate:
Construction and land development
99,546
123,147
Commercial real estate
632,022
637,701
Residential real estate:
Residential
205,277
209,326
Home equity
104,873
109,857
Consumer
5,259
4,428
Total loans
$
1,331,153
$
1,336,125
Acquired Loans
The outstanding principal balance and the carrying amount of these loans, including FASB Accounting Standards Codification ("ASC") 310-30, included in the consolidated balance sheets at September 30, 2018 and December 31, 2017 are as follows (dollars in thousands):
September 30, 2018
December 31, 2017
Outstanding principal balance
$
66,544
$
79,523
Carrying amount
61,537
73,796
The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies ASC 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):
September 30, 2018
December 31, 2017
Outstanding principal balance
$
25,285
$
27,876
Carrying amount
21,221
23,430
The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, for the nine months ended September 30, 2018 and the year ended December 31, 2017 (dollars in thousands):
September 30, 2018
December 31, 2017
Balance at January 1
$
4,890
$
6,103
Accretion
(1,816
)
(3,117
)
Reclassification from nonaccretable difference
769
1,006
Other changes, net*
715
898
$
4,558
$
4,890
* This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.
14
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 2018 (dollars in thousands):
30- 59 Days Past Due
60-89 Days Past Due
90 Days + Past Due and Still Accruing
Non- Accrual Loans
Total Past Due
Current
Total Loans
Commercial
$
7
$
—
$
—
$
1,054
$
1,061
$
283,115
$
284,176
Commercial real estate:
Construction and land development
—
—
—
30
30
99,516
99,546
Commercial real estate
45
—
—
215
260
631,762
632,022
Residential:
Residential
69
427
74
795
1,365
203,912
205,277
Home equity
129
—
—
144
273
104,600
104,873
Consumer
15
—
—
—
15
5,244
5,259
Total
$
265
$
427
$
74
$
2,238
$
3,004
$
1,328,149
$
1,331,153
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2017 (dollars in thousands):
30- 59 Days Past Due
60-89 Days Past Due
90 Days + Past Due and Still Accruing
Non- Accrual Loans
Total Past Due
Current
Total Loans
Commercial
$
92
$
—
$
—
$
90
$
182
$
251,484
$
251,666
Commercial real estate:
Construction and land development
—
—
—
36
36
123,111
123,147
Commercial real estate
86
—
280
489
855
636,846
637,701
Residential:
Residential
282
71
79
1,343
1,775
207,551
209,326
Home equity
141
16
—
243
400
109,457
109,857
Consumer
21
5
—
—
26
4,402
4,428
Total
$
622
$
92
$
359
$
2,201
$
3,274
$
1,332,851
$
1,336,125
15
Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at September 30, 2018 (dollars in thousands):
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded:
Commercial
$
32
$
32
$
—
$
48
$
4
Commercial real estate:
Construction and land development
—
—
—
—
—
Commercial real estate
496
492
—
583
29
Residential:
Residential
658
658
—
932
21
Home equity
51
51
—
123
9
Consumer
—
—
—
2
—
$
1,237
$
1,233
$
—
$
1,688
$
63
With a related allowance recorded:
Commercial
$
1,002
$
1,000
$
791
$
427
$
49
Commercial real estate:
Construction and land development*
—
—
—
26
—
Commercial real estate*
—
—
—
23
—
Residential
Residential
176
176
9
384
7
Home equity*
—
—
—
160
1
Consumer*
—
—
—
—
—
$
1,178
$
1,176
$
800
$
1,020
$
57
Total:
Commercial
$
1,034
$
1,032
$
791
$
475
$
53
Commercial real estate:
Construction and land development
—
—
—
26
—
Commercial real estate
496
492
—
606
29
Residential:
Residential
834
834
9
1,316
28
Home equity
51
51
—
283
10
Consumer
—
—
—
2
—
$
2,415
$
2,409
$
800
$
2,708
$
120
* Allowance is reported as zero in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs exceed unearned fees.
16
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2017 (dollars in thousands):
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded:
Commercial
$
4
$
4
$
—
$
19
$
1
Commercial real estate:
Construction and land development
—
—
—
56
4
Commercial real estate
791
789
—
1,069
66
Residential:
Residential
717
719
—
575
41
Home equity
142
142
—
109
10
Consumer
5
5
—
6
1
$
1,659
$
1,659
$
—
$
1,834
$
123
With a related allowance recorded:
Commercial
$
202
$
201
$
154
$
150
$
16
Commercial real estate:
Construction and land development*
37
37
—
56
—
Commercial real estate*
34
32
—
126
11
Residential:
Residential
1,022
1,022
12
1,174
27
Home equity
263
261
1
251
1
Consumer*
—
—
—
5
—
$
1,558
$
1,553
$
167
$
1,762
$
55
Total:
Commercial
$
206
$
205
$
154
$
169
$
17
Commercial real estate:
Construction and land development
37
37
—
112
4
Commercial real estate
825
821
—
1,195
77
Residential:
Residential
1,739
1,741
12
1,749
68
Home equity
405
403
1
360
11
Consumer
5
5
—
11
1
$
3,217
$
3,212
$
167
$
3,596
$
178
* Allowance is reported as zero in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans with unearned costs exceed unearned fees.
17
The following tables show the detail of loans modified as troubled debt restructurings ("TDRs") during the three and nine months ended September 30, 2018 included in the impaired loan balances (dollars in thousands):