Item 5. Other Information 65 Item 6. Exhibits 66 Signatures 67
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Accounting Policies
Note 2 - Acquisitions
Note 3 - Securities
Note 4 - Loans
Note 5 - Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Note 6 - Goodwill and Other Intangible Assets
Note 7 - Leases
Note 8 - Short-Term Borrowings
Note 9 - Long-Term Borrowings
Note 10 - Subordinated Debt
Note 11 - Junior Subordinated Debt
Note 12 - Derivative Financial Instruments and Hedging Activities
Note 13 - Stock Based Compensation
Note 14 - Earnings per Common Share
Note 15 - Employee Benefit Plans
Note 16 - Fair Value Measurements
Note 17 - Segment and Related Information
Note 18 - Supplemental Cash Flow Information
Note 19 - Accumulated Other Comprehensive Income (Loss)
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-06302019xexhibit311.htm
EX-31.2
amnb-06302019xexhibit312.htm
EX-32.1
amnb-06302019xexhibit321.htm
EX-32.2
amnb-06302019xexhibit322.htm
American National Bankshares Earnings 2019-06-30
AMNB 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 amnb-06302019x10q.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 June 30, 2019.
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
AMNB
Nasdaq Global Select Market
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 o
Non-accelerated filer o
Smaller reporting company x
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 July 29, 2019, the Company had 11,143,132 shares of Common Stock outstanding, $1 par value.
Common stock, $1 par, 20,000,000 shares authorized, 11,141,355 shares outstanding at June 30, 2019 and 8,720,337 shares outstanding at December 31, 2018
11,089
8,668
Capital in excess of par value
160,572
78,172
Retained earnings
141,339
141,537
Accumulated other comprehensive loss, net
(1,083
)
(5,835
)
Total shareholders' equity
311,917
222,542
Total liabilities and shareholders' equity
$
2,418,082
$
1,862,866
(*) - Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
4
American National Bankshares Inc.
Consolidated Statements of Income (Loss)
(Dollars in thousands, except per share data) (Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
2019
2018
Interest and Dividend Income:
Interest and fees on loans
$
22,629
$
14,766
$
38,267
$
29,423
Interest and dividends on securities:
Taxable
1,980
1,540
3,801
2,864
Tax-exempt
239
423
526
842
Dividends
105
78
189
158
Other interest income
258
185
524
373
Total interest and dividend income
25,211
16,992
43,307
33,660
Interest Expense:
Interest on deposits
3,520
1,873
5,992
3,698
Interest on short-term borrowings
178
2
350
12
Interest on long-term borrowings
14
—
14
—
Interest on subordinated debt
122
—
122
—
Interest on junior subordinated debt
388
329
772
619
Total interest expense
4,222
2,204
7,250
4,329
Net Interest Income
20,989
14,788
36,057
29,331
Provision for (recovery of) loan losses
(10
)
(30
)
6
(74
)
Net Interest Income After Provision for (Recovery of) Loan Losses
20,999
14,818
36,051
29,405
Noninterest Income:
Trust fees
933
945
1,847
1,874
Service charges on deposit accounts
724
592
1,318
1,204
Other fees and commissions
1,015
679
1,723
1,321
Mortgage banking income
586
491
992
941
Securities gains, net
147
289
470
410
Brokerage fees
186
209
333
431
Income (loss) from Small Business Investment Companies
(137
)
171
31
326
Gains (losses) on premises and equipment, net
(87
)
—
(87
)
3
Other
315
187
506
386
Total noninterest income
3,682
3,563
7,133
6,896
Noninterest Expense:
Salaries
7,048
5,095
11,712
10,092
Employee benefits
1,425
1,111
2,655
2,286
Occupancy and equipment
1,431
1,100
2,515
2,228
FDIC assessment
169
132
294
278
Bank franchise tax
412
291
702
572
Core deposit intangible amortization
458
77
513
154
Data processing
717
467
1,249
889
Software
321
354
645
659
Other real estate owned, net
(44
)
25
(31
)
55
Merger related expense
10,871
—
11,322
—
Other
3,508
2,350
5,669
4,491
Total noninterest expense
26,316
11,002
37,245
21,704
Income (Loss) Before Income Taxes
(1,635
)
7,379
5,939
14,597
5
Income Taxes
(405
)
1,399
1,166
2,805
Net Income (Loss)
$
(1,230
)
$
5,980
$
4,773
$
11,792
Net Income (Loss) Per Common Share:
Basic
$
(0.11
)
$
0.69
$
0.48
$
1.36
Diluted
$
(0.11
)
$
0.69
$
0.48
$
1.36
Weighted Average Common Shares Outstanding:
Basic
11,126,800
8,692,107
9,942,566
8,680,739
Diluted
11,126,800
8,704,726
9,952,115
8,695,860
The accompanying notes are an integral part of the consolidated financial statements.
6
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
Three Months Ended June 30,
2019
2018
Net income (loss)
$
(1,230
)
$
5,980
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
4,106
(1,446
)
Tax effect
(920
)
325
Reclassification adjustment for gains on sales or calls of securities available for sale
(136
)
—
Tax effect
31
—
Unrealized losses on cash flow hedges
(1,086
)
(237
)
Tax effect
243
53
Other comprehensive income (loss)
2,238
(1,305
)
Comprehensive income
$
1,008
$
4,675
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)
Six Months Ended June 30,
2019
2018
Net income
$
4,773
$
11,792
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
8,075
(5,180
)
Tax effect
(1,809
)
1,186
Reclassification adjustment for gains on sales or calls of securities available for sale
(140
)
(8
)
Tax effect
32
2
Unrealized losses on cash flow hedges
(1,811
)
(237
)
Tax effect
405
53
Other comprehensive income (loss)
4,752
(4,184
)
Comprehensive income
$
9,525
$
7,608
The accompanying notes are an integral part of the consolidated financial statements.
7
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended June 30, 2019 and 2018
(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, April 1, 2018
$
8,621
$
76,525
$
131,299
$
(6,605
)
$
209,840
Net income
—
—
5,980
—
5,980
Other comprehensive loss
—
—
—
(1,305
)
(1,305
)
Reclassification for ASU 2016-01 adoption
—
—
—
—
—
Stock options exercised (28,710 shares)
29
661
—
—
690
Vesting of restricted stock
—
—
—
—
—
Equity based compensation (4,384 shares)
4
310
—
—
314
Cash dividends paid, $0.50 per share
—
—
(2,171
)
—
(2,171
)
Balance, June 30, 2018
$
8,654
$
77,496
$
135,108
$
(7,910
)
$
213,348
Balance, April 1, 2019
$
8,705
$
78,738
$
145,351
$
(3,321
)
$
229,473
Net loss
—
—
(1,230
)
—
(1,230
)
Other comprehensive income
—
—
—
2,238
2,238
Issuance of common stock (2,361,686 shares)
2,362
80,108
—
—
82,470
Issuance of replacement options/restricted stock
—
870
—
—
870
Stock options exercised (17,330 shares)
17
271
—
—
288
Vesting of restricted stock
—
—
—
—
—
Equity based compensation (5,770 shares)
5
585
—
—
590
Cash dividends paid, $0.50 per share
—
—
(2,782
)
—
(2,782
)
Balance, June 30, 2019
$
11,089
$
160,572
$
141,339
$
(1,083
)
$
311,917
The accompanying notes are an integral part of the consolidated financial statements.
8
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2019 and 2018
(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, 2017
$
8,604
$
76,179
$
127,010
$
(3,076
)
$
208,717
Net income
—
—
11,792
—
11,792
Other comprehensive loss
—
—
—
(4,184
)
(4,184
)
Reclassification for ASU 2016-01 adoption
—
—
650
(650
)
—
Stock options exercised (32,010 shares)
32
743
—
—
775
Vesting of restricted stock (10,101 shares)
10
(10
)
—
—
—
Equity based compensation (25,570 shares)
8
584
—
—
592
Cash dividends paid, $0.50 per share
—
—
(4,344
)
—
(4,344
)
Balance, June 30, 2018
$
8,654
$
77,496
$
135,108
$
(7,910
)
$
213,348
Balance, December 31, 2018
$
8,668
$
78,172
$
141,537
$
(5,835
)
$
222,542
Net income
—
—
4,773
—
4,773
Other comprehensive income
—
—
—
4,752
4,752
Issuance of common stock (2,361,686 shares)
2,362
80,108
—
—
82,470
Issuance of replacement options/restricted stock
—
870
—
—
870
Stock options exercised (30,530 shares)
30
548
—
—
578
Vesting of restricted stock (20,285 shares)
20
(20
)
—
—
—
Equity based compensation (28,802 shares)
9
894
—
—
903
Cash dividends paid, $0.50 per share
—
—
(4,971
)
—
(4,971
)
Balance, June 30, 2019
$
11,089
$
160,572
$
141,339
$
(1,083
)
$
311,917
The accompanying notes are an integral part of the consolidated financial statements.
9
American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended June 30,
2019
2018
Cash Flows from Operating Activities:
Net income
$
4,773
$
11,792
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses
6
(74
)
Depreciation
958
933
Net accretion of acquisition accounting adjustments
(1,373
)
(804
)
Core deposit intangible amortization
513
154
Net amortization of securities
613
859
Net gain on sale or call of securities available for sale
(140
)
(8
)
Net change in fair value of equity securities
(330
)
(402
)
Gain on sale of loans held for sale
(992
)
(941
)
Proceeds from sales of loans held for sale
41,962
39,145
Originations of loans held for sale
(43,495
)
(38,861
)
Net gain on other real estate owned
(134
)
(25
)
Valuation allowance on other real estate owned
56
22
Net loss (gain) on sale of premises and equipment
87
(3
)
Equity based compensation expense
903
592
Earnings on bank owned life insurance
(264
)
(214
)
Deferred income tax expense (benefit)
222
(27
)
Net change in interest receivable
229
(62
)
Net change in other assets
8,880
(875
)
Net change in interest payable
93
(2
)
Net change in other liabilities
(2,211
)
(34
)
Net cash provided by operating activities
10,356
11,165
Cash Flows from Investing Activities:
Proceeds from sales of equity securities
317
431
Proceeds from sales of securities available for sale
29,878
22,066
Proceeds from maturities, calls and paydowns of securities available for sale
38,817
16,000
Purchases of securities available for sale
(26,312
)
(66,221
)
Net change in restricted stock
39
647
Net increase in loans
(33,371
)
(2,952
)
Proceeds from sale of premises and equipment
—
24
Purchases of premises and equipment
(1,299
)
(932
)
Proceeds from sales of other real estate owned
1,137
636
Cash paid in bank acquisition
(27
)
—
Cash acquired in bank acquisition
26,283
—
Net cash provided by (used in) investing activities
35,462
(30,301
)
Cash Flows from Financing Activities:
Net change in demand, money market, and savings deposits
(36,239
)
37,585
Net change in time deposits
(14,373
)
(11,565
)
Net change in customer repurchase agreements
1,979
(3,950
)
Net change in other short-term borrowings
(1,355
)
(18,500
)
Net change in long-term borrowings
(778
)
—
Common stock dividends paid
(4,971
)
(4,344
)
Proceeds from exercise of stock options
578
775
Net cash (used in) provided by financing activities
(55,159
)
1
Net Decrease in Cash and Cash Equivalents
(9,341
)
(19,135
)
Cash and Cash Equivalents at Beginning of Period
64,255
52,477
Cash and Cash Equivalents at End of Period
$
54,914
$
33,342
The accompanying notes are an integral part of the consolidated financial statements.
10
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, other-than-temporary impairment of securities, accounting for merger and acquisition activity, derivative financial instruments, accounting for acquired loans with specific credit-related deterioration, the valuation of 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 11.
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, 2018.
Adoption of New Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees are 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. 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 Financial Accounting Standards Board ("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 continue to be in accordance with current GAAP (Topic 840, Leases). The Company adopted using the additional (and optional) transition method. The effect of adopting this standard on January 1, 2019 was an approximately $4.4 million increase in assets and liabilities on the Company's consolidated balance sheet.
Recent Accounting Pronouncements
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
11
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. Based on FASB’s July 17, 2019 meeting, an exposure draft is expected that, once finalized, could change implementation dates for many companies. The Company has implemented and completed a significant amount of a project plan addressing the components of this ASU 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 August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact that ASU 2018-14 will have on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." The amendments in this ASU clarify and improve areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief." The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.
12
Note 2 - Acquisitions
On April 1, 2019, the Company completed its acquisition of Roanoke-based HomeTown Bankshares Corporation ("HomeTown") and its wholly-owned subsidiary bank, HomeTown Bank. Pursuant and subject to the terms of the merger agreement, as a result of the merger, the holders of shares of HomeTown common stock received 0.4150 shares of the Company's common stock for each share of HomeTown common stock held immediately prior to the effective date of the merger.
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with Accounting Standards Codification ("ASC") 350, Intangibles-Goodwill and Other. The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):
Consideration Paid:
Common shares issued (2,361,686)
$
82,470
Issuance of replacement stock options/restricted stock
753
Cash paid in lieu of fractional shares
27
Value of consideration
83,250
Assets acquired:
Cash and cash equivalents
26,283
Investment securities
34,876
Restricted stock
2,588
Loans
444,324
Premises and equipment
12,554
Deferred income taxes
2,329
Core deposit intangible
8,200
Other real estate owned
1,442
Banked owned life insurance
8,246
Other assets
14,244
Total assets
555,086
Liabilities assumed:
Deposits
483,626
Short-term FHLB advances
14,883
Long-term FHLB advances
778
Subordinated debt
7,530
Other liabilities
5,780
Total liabilities
512,597
Net assets acquired
42,489
Goodwill resulting from merger with HomeTown
$
40,761
The acquired loans were recorded at fair value at the acquisition date without carryover of HomeTown's previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust fair values in accordance with accounting for business combinations.
13
The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (acquired performing).
The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):
Contractually required principal and interest at acquisition
$
45,551
Contractual cash flows not expected to be collected (nonaccretable difference)
8,296
Expected cash flows at acquisition
37,255
Interest component of expected cash flows (accretable yield)
4,410
Fair value of acquired loans accounted for under FASB ASC 310-30
$
32,845
Direct costs related to the acquisition were expensed as incurred. During the six months ended June 30, 2019, the Company incurred $11.3 million in merger and acquisition integration expenses related to the merger, including $9.1 million in data processing termination and conversion costs, $1.7 million in legal and professional fees, $0.4 million in salary related expense, and $0.1 million in other noninterest expenses. The majority of these expenses were related to integration and are deductible for tax purposes.
The following table presents unaudited pro forma information as if the acquisition of HomeTown had occurred on January 1, 2018. These results combine the historical results of HomeTown in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of HomeTown's provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the net impact of accretion for 2018 and the elimination of merger-related costs for 2019. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands, except per share data):
Pro forma Six Months Ended
June 30, 2019
June 30, 2018
Total revenues (1)
$
45,768
$
49,419
Net income
13,382
14,755
Earnings per share
1.20
1.33
(1) Includes net interest income and noninterest income.
Note 3 – Securities
The amortized cost and fair value of investments in debt securities at June 30, 2019 were as follows (dollars in thousands):
June 30, 2019
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Securities available for sale:
Federal agencies and GSEs
$
136,066
$
1,594
$
647
$
137,013
Mortgage-backed and CMOs
135,871
1,426
398
136,899
State and municipal
51,559
733
47
52,245
Corporate
8,016
153
—
8,169
Total securities available for sale
$
331,512
$
3,906
$
1,092
$
334,326
The Company adopted ASU 2016-01 effective January 1, 2018 and had equity securities with a fair value of $125,000 at June 30, 2019 and recognized in income a $330,000 change in the fair value of equity securities during the first six months of 2019. During the six months ended June 30, 2019, the Company sold $317,000 in equity securities at fair value. The Company had equity securities with a fair value of $2,177,000 at June 30, 2018 and recognized in income a $402,000 change in the fair value of equity securities during the first six months of 2018.
14
The amortized cost and fair value of investments in debt securities at December 31, 2018 were as follows (dollars in thousands):
December 31, 2018
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Securities available for sale:
Federal agencies and GSEs
$
137,070
$
442
$
3,473
$
134,039
Mortgage-backed and CMOs
113,883
385
2,401
111,867
State and municipal
80,022
411
531
79,902
Corporate
6,799
68
22
6,845
Total securities available for sale
$
337,774
$
1,306
$
6,427
$
332,653
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 June 30, 2019 and December 31, 2018 was as follows (dollars in thousands):
June 30, 2019
December 31, 2018
FRB stock
$
5,045
$
3,621
FHLB stock
2,751
1,626
Total restricted stock
$
7,796
$
5,247
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 June 30, 2019. 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, at June 30, 2019, 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
$
86,417
$
647
$
2,038
$
28
$
84,379
$
619
Mortgage-backed and CMOs
59,842
398
848
2
58,994
396
State and municipal
10,679
47
—
—
10,679
47
Corporate
—
—
—
—
—
—
Total
$
156,938
$
1,092
$
2,886
$
30
$
154,052
$
1,062
Federal agencies and GSEs: The unrealized losses on the Company's investment in 30 government sponsored entities ("GSE") securities were caused by interest rate increases. Seventeen 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 June 30, 2019.
Mortgage-backed securities: The unrealized losses on the Company's investment in 41 GSE mortgage-backed securities were caused by interest rate increases. Thirty-six 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
15
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 June 30, 2019.
Collateralized Mortgage Obligations: The unrealized loss associated with one private GSE collateralized mortgage obligation ("CMO") was due to normal market fluctuations. This one security was in an unrealized loss position for 12 months or more. The contractual cash flows of that investment is guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the security would not be settled at a price less than the amortized cost basis of the Company's investment. 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 investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider the investment to be other-than-temporarily impaired at June 30, 2019.
State and municipal securities: The unrealized losses on 13 state and municipal securities were caused by interest rate increases. Thirteen 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 June 30, 2019.
Corporate securities: There were no corporate bonds in an unrealized loss position at June 30, 2019.
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 June 30, 2019, 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, 2018 (dollars in thousands):
Total
Less than 12 Months
12 Months or More
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Fair Value
Unrealized Loss
Federal agencies and GSEs
$
103,797
$
3,473
$
14,982
$
8
$
88,815
$
3,465
Mortgage-backed and CMOs
86,852
2,401
5,473
15
81,379
2,386
State and municipal
39,755
531
7,199
18
32,556
513
Corporate
484
22
—
—
484
22
Total
$
230,888
$
6,427
$
27,654
$
41
$
203,234
$
6,386
Other-Than-Temporarily-Impaired Securities
As of June 30, 2019 and December 31, 2018, there were no securities classified as other-than-temporarily impaired.
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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 six months ended June 30, 2019 and 2018 (dollars in thousands):
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Realized gains (losses):
Gross realized gains
$
190
$
194
Gross realized losses
(54
)
(54
)
Net realized gains
$
136
$
140
Proceeds from sales of securities
$
29,878
$
29,878
Three Months Ended June 30, 2018
Six Months Ended June 30, 2018
Realized gains (losses):
Gross realized gains
$
—
$
105
Gross realized losses
—
(97
)
Net realized gains
$
—
$
8
Proceeds from sales of securities
$
—
$
22,066
Note 4 – Loans
Loans, excluding loans held for sale, at June 30, 2019 and December 31, 2018, were comprised of the following (dollars in thousands):
June 30, 2019
December 31, 2018
Commercial
$
340,427
$
285,972
Commercial real estate:
Construction and land development
152,876
97,240
Commercial real estate
880,146
655,800
Residential real estate:
Residential
328,400
209,438
Home equity
121,905
103,933
Consumer
12,487
5,093
Total loans
$
1,836,241
$
1,357,476
Acquired Loans
The outstanding principal balance and the carrying amount of these loans, including loans accounted for under ASC 310-30, included in the consolidated balance sheets at June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):
June 30, 2019
December 31, 2018
Outstanding principal balance
$
482,640
$
63,619
Carrying amount
464,419
58,886
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):
June 30, 2019
December 31, 2018
Outstanding principal balance
$
62,006
$
24,500
Carrying amount
51,297
20,611
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The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies ASC 310-30, for the six months ended June 30, 2019 and the year ended December 31, 2018 (dollars in thousands):
June 30, 2019
December 31, 2018
Balance at January 1
$
4,633
$
4,890
Additions from merger with HomeTown
4,410
—
Accretion
(1,527
)
(2,362
)
Reclassification from nonaccretable difference
222
956
Other changes, net*
283
1,149
$
8,021
$
4,633
* 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.
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at June 30, 2019 (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
$
313
$
1,168
$
4
$
49
$
1,534
$
338,893
$
340,427
Commercial real estate:
Construction and land development
211
130
53
23
417
152,459
152,876
Commercial real estate
1,951
—
465
116
2,532
877,614
880,146
Residential:
Residential
743
841
408
706
2,698
325,702
328,400
Home equity
101
220
—
75
396
121,509
121,905
Consumer
24
—
—
—
24
12,463
12,487
Total
$
3,343
$
2,359
$
930
$
969
$
7,601
$
1,828,640
$
1,836,241
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2018 (dollars in thousands):
30- 59 Days Past Due
60-89 Days Past Due
90 Days + Past Due and Still Accruing
Non- Accrual Loans
Total Past Due
Current
Total Loans
Commercial
$
20
$
—
$
—
$
83
$
103
$
285,869
$
285,972
Commercial real estate:
Construction and land development
—
—
—
27
27
97,213
97,240
Commercial real estate
42
—
—
197
239
655,561
655,800
Residential:
Residential
456
157
72
659
1,344
208,094
209,438
Home equity
126
—
—
124
250
103,683
103,933
Consumer
21
3
—
—
24
5,069
5,093
Total
$
665
$
160
$
72
$
1,090
$
1,987
$
1,355,489
$
1,357,476
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Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at June 30, 2019 (dollars in thousands):