QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 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 x
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 November 1, 2019, the Company had 11,113,336 shares of Common Stock outstanding, $1 par value.
Common stock, $1 par, 20,000,000 shares authorized, 11,116,250 shares outstanding at September 30, 2019 and 8,720,337 shares outstanding at December 31, 2018
11,063
8,668
Capital in excess of par value
159,792
78,172
Retained earnings
147,030
141,537
Accumulated other comprehensive loss, net
(639
)
(5,835
)
Total shareholders' equity
317,246
222,542
Total liabilities and shareholders' equity
$
2,454,529
$
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
(Dollars in thousands, except per share data) (Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Interest and Dividend Income:
Interest and fees on loans
$
22,470
$
15,062
$
60,737
$
44,485
Interest and dividends on securities:
Taxable
1,890
1,568
5,691
4,432
Tax-exempt
134
362
660
1,204
Dividends
135
82
324
240
Other interest income
329
143
853
516
Total interest and dividend income
24,958
17,217
68,265
50,877
Interest Expense:
Interest on deposits
3,655
2,048
9,647
5,746
Interest on short-term borrowings
162
29
512
41
Interest on long-term borrowings
—
—
14
—
Interest on subordinated debt
123
—
245
—
Interest on junior subordinated debt
396
389
1,168
1,008
Total interest expense
4,336
2,466
11,586
6,795
Net Interest Income
20,622
14,751
56,679
44,082
Recovery of loan losses
(12
)
(23
)
(6
)
(97
)
Net Interest Income After Recovery of Loan Losses
20,634
14,774
56,685
44,179
Noninterest Income:
Trust fees
979
1,001
2,826
2,875
Service charges on deposit accounts
783
605
2,101
1,809
Other fees and commissions
1,003
656
2,726
1,977
Mortgage banking income
710
551
1,702
1,492
Securities gains (losses), net
105
(17
)
575
393
Brokerage fees
183
172
516
603
Income from Small Business Investment Companies
143
150
174
476
Gains (losses) on premises and equipment, net
(2
)
63
(89
)
66
Other
267
199
773
585
Total noninterest income
4,171
3,380
11,304
10,276
Noninterest Expense:
Salaries
6,295
5,285
18,007
15,377
Employee benefits
1,367
1,036
4,022
3,322
Occupancy and equipment
1,448
1,069
3,963
3,297
FDIC assessment (credit)
(175
)
134
119
412
Bank franchise tax
411
291
1,113
863
Core deposit intangible amortization
448
56
961
210
Data processing
589
420
1,838
1,309
Software
287
307
932
966
Other real estate owned, net
47
46
16
101
Merger related expense
—
—
11,322
—
Other
3,075
2,260
8,744
6,751
Total noninterest expense
13,792
10,904
51,037
32,608
Income Before Income Taxes
11,013
7,250
16,952
21,847
Income Taxes
2,321
1,465
3,487
4,270
Net Income
$
8,692
$
5,785
$
13,465
$
17,577
5
Net Income Per Common Share:
Basic
$
0.78
$
0.66
$
1.30
$
2.02
Diluted
$
0.78
$
0.66
$
1.30
$
2.02
Weighted Average Common Shares Outstanding:
Basic
11,127,603
8,712,443
10,341,919
8,691,423
Diluted
11,138,008
8,718,918
10,351,753
8,703,662
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 September 30,
2019
2018
Net income
$
8,692
$
5,785
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
1,536
(1,965
)
Tax effect
(344
)
440
Reclassification adjustment for gains on sales or calls of securities available for sale
(102
)
(73
)
Tax effect
22
16
Unrealized gains (losses) on cash flow hedges
(862
)
438
Tax effect
194
(98
)
Other comprehensive income (loss)
444
(1,242
)
Comprehensive income
$
9,136
$
4,543
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,
2019
2018
Net income
$
13,465
$
17,577
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
9,611
(7,145
)
Tax effect
(2,153
)
1,626
Reclassification adjustment for gains on sales or calls of securities available for sale
(242
)
(81
)
Tax effect
54
18
Unrealized gains (losses) on cash flow hedges
(2,673
)
201
Tax effect
599
(45
)
Other comprehensive income (loss)
5,196
(5,426
)
Comprehensive income
$
18,661
$
12,151
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 September 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, June 30, 2018
$
8,654
$
77,496
$
135,108
$
(7,910
)
$
213,348
Net income
—
—
5,785
—
5,785
Other comprehensive loss
—
—
—
(1,242
)
(1,242
)
Stock options exercised (3,300 shares)
3
83
—
—
86
Vesting of restricted stock (617 shares)
1
(1
)
—
—
—
Equity based compensation (3,004 shares)
3
264
—
—
267
Cash dividends paid, $0.25 per share
—
—
(2,178
)
—
(2,178
)
Balance, September 30, 2018
$
8,661
$
77,842
$
138,715
$
(9,152
)
$
216,066
Balance, June 30, 2019
$
11,089
$
160,572
$
141,339
$
(1,083
)
$
311,917
Net income
—
—
8,692
—
8,692
Other comprehensive income
—
—
—
444
444
Stock repurchased (32,165 shares)
(32
)
(1,106
)
—
—
(1,138
)
Stock options exercised (1,826 shares)
2
29
—
—
31
Vesting of restricted stock (617 shares)
1
(1
)
—
—
—
Equity based compensation (5,234 shares)
3
298
—
—
301
Cash dividends paid, $0.27 per share
—
—
(3,001
)
—
(3,001
)
Balance, September 30, 2019
$
11,063
$
159,792
$
147,030
$
(639
)
$
317,246
The accompanying notes are an integral part of the consolidated financial statements.
8
American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 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
—
—
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
Balance, December 31, 2018
$
8,668
$
78,172
$
141,537
$
(5,835
)
$
222,542
Net income
—
—
13,465
—
13,465
Other comprehensive income
—
—
—
5,196
5,196
Issuance of common stock (2,361,686 shares)
2,362
80,108
—
—
82,470
Issuance of replacement options/restricted stock
—
870
—
—
870
Stock repurchased (32,165 shares)
(32
)
(1,106
)
—
—
(1,138
)
Stock options exercised (32,356 shares)
32
577
—
—
609
Vesting of restricted stock (20,902 shares)
21
(21
)
—
—
—
Equity based compensation (34,036 shares)
12
1,192
—
—
1,204
Cash dividends paid, $0.77 per share
—
—
(7,972
)
—
(7,972
)
Balance, September 30, 2019
$
11,063
$
159,792
$
147,030
$
(639
)
$
317,246
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)
Nine Months Ended September 30,
2019
2018
Cash Flows from Operating Activities:
Net income
$
13,465
$
17,577
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery of loan losses
(6
)
(97
)
Depreciation
1,504
1,366
Net accretion of acquisition accounting adjustments
(2,321
)
(1,002
)
Core deposit intangible amortization
961
210
Net amortization of securities
845
1,262
Net gain on sale or call of securities available for sale
(242
)
(81
)
Net change in fair value of equity securities
(333
)
(312
)
Gain on sale of loans held for sale
(1,702
)
(1,492
)
Proceeds from sales of loans held for sale
72,452
61,772
Originations of loans held for sale
(75,756
)
(60,575
)
Net (gain) loss on other real estate owned
(124
)
5
Valuation allowance on other real estate owned
68
28
Net loss (gain) on sale of premises and equipment
89
(66
)
Equity based compensation expense
1,204
859
Earnings on bank owned life insurance
(425
)
(325
)
Deferred income tax expense
205
203
Net change in interest receivable
995
(1
)
Net change in other assets
4,695
(660
)
Net change in interest payable
29
93
Net change in other liabilities
(2,852
)
136
Net cash provided by operating activities
12,751
18,900
Cash Flows from Investing Activities:
Proceeds from sales of equity securities
445
431
Proceeds from sales of securities available for sale
29,878
57,607
Proceeds from maturities, calls and paydowns of securities available for sale
76,162
23,561
Purchases of securities available for sale
(36,517
)
(66,221
)
Net change in restricted stock
(786
)
871
Net (increase) decrease in loans
(805
)
5,600
Proceeds from sale of premises and equipment
—
233
Purchases of premises and equipment
(2,070
)
(1,322
)
Proceeds from sales of other real estate owned
1,248
808
Cash paid in bank acquisition
(27
)
—
Cash acquired in bank acquisition
26,283
—
Net cash provided by investing activities
93,811
21,568
Cash Flows from Financing Activities:
Net change in demand, money market, and savings deposits
8,384
(1,321
)
Net change in time deposits
(16,103
)
(10,298
)
Net change in customer repurchase agreements
3,681
18,378
Net change in other short-term borrowings
(14,883
)
(24,000
)
Net change in long-term borrowings
(778
)
—
Common stock dividends paid
(7,972
)
(6,522
)
Repurchase of common stock
(1,138
)
—
Proceeds from exercise of stock options
609
861
Net cash used in financing activities
(28,200
)
(22,902
)
Net Increase in Cash and Cash Equivalents
78,362
17,566
Cash and Cash Equivalents at Beginning of Period
64,255
52,477
Cash and Cash Equivalents at End of Period
$
142,617
$
70,043
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, accounting for acquired loans with specific credit-related deterioration, and the valuation of deferred tax assets and liabilities.
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. At the FASB’s October 16, 2019 meeting, the board amended the effective date of this ASU for many companies. Public business entities that are Securities and Exchange Commission ("SEC") filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. As a smaller reporting company, the Company has elected to defer adoption until January, 2023. The Company will continue to validate its models that will be used upon future adoption of the standard. The implementation of this ASU will likely result in increases to the Company's reserves when implemented.
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 nine months ended September 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 tables present 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 Three Months Ended
September 30, 2019
September 30, 2018
Total revenues (1)
$
24,636
$
24,478
Net income
8,608
7,458
Earnings per share
0.77
0.67
(1) Includes net interest income and noninterest income.
Pro forma Nine Months Ended
September 30, 2019
September 30, 2018
Total revenues (1)
$
70,404
$
73,897
Net income
21,996
22,213
Earnings per share
1.98
2.01
(1) Includes net interest income and noninterest income.
14
Note 3 – Securities
The amortized cost and fair value of investments in debt securities at September 30, 2019 were as follows (dollars in thousands):
September 30, 2019
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Securities available for sale:
Federal agencies and GSEs
$
119,682
$
1,837
$
263
$
121,256
Mortgage-backed and CMOs
133,533
1,875
207
135,201
State and municipal
43,012
871
28
43,855
Corporate
8,015
163
—
8,178
Total securities available for sale
$
304,242
$
4,746
$
498
$
308,490
The Company adopted ASU 2016-01 effective January 1, 2018. The Company recognized in income a $333,000 change in the fair value of equity securities during the nine months of 2019. During the nine months ended September 30, 2019, the Company sold $445,000 in equity securities at fair value and had no remaining equity securities at September 30, 2019. The Company had equity securities with a fair value of $2,087,000 at September 30, 2018 and recognized in income a $312,000 change in the fair value of equity securities during the nine months of 2018. During the 2018 period, the Company sold $431,000 in equity securities at fair value.
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 September 30, 2019 and December 31, 2018 was as follows (dollars in thousands):
September 30, 2019
December 31, 2018
FRB stock
$
6,406
$
3,621
FHLB stock
2,215
1,626
Total restricted stock
$
8,621
$
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 September 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.
15
Available for sale securities that have been in a continuous unrealized loss position, at September 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
$
59,141
$
263
$
1,889
$
30
$
57,252
$
233
Mortgage-backed and CMOs
32,617
207
7,468
12
25,149
195
State and municipal
4,579
28
3,428
19
1,151
9
Total
$
96,337
$
498
$
12,785
$
61
$
83,552
$
437
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. Twelve 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, 2019.
Mortgage-backed securities: The unrealized losses on the Company's investment in 24 GSE mortgage-backed securities were caused by interest rate increases. Seventeen 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, 2019.
Collateralized Mortgage Obligations: The unrealized losses associated with four private GSE collateralized mortgage obligations ("CMOs") 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 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 September 30, 2019.
State and municipal securities: The unrealized losses on seven state and municipal securities were caused by interest rate increases. Two 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, 2019.
Corporate securities: There were no corporate bonds in an unrealized loss position at September 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 September 30, 2019, and no impairment has been recognized.
16
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 September 30, 2019 and December 31, 2018, 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, 2019 and 2018 (dollars in thousands):
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Realized gains (losses):
Gross realized gains
$
—
$
194
Gross realized losses
—
(54
)
Net realized gains
$
—
$
140
Proceeds from sales of securities
$
—
$
29,878
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
Note 4 – Loans
Loans, excluding loans held for sale, at September 30, 2019 and December 31, 2018, were comprised of the following (dollars in thousands):
September 30, 2019
December 31, 2018
Commercial
$
324,508
$
285,972
Commercial real estate:
Construction and land development
143,788
97,240
Commercial real estate
883,219
655,800
Residential real estate:
Residential
318,833
209,438
Home equity
122,074
103,933
Consumer
12,025
5,093
Total loans
$
1,804,447
$
1,357,476
17
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 September 30, 2019 and December 31, 2018 are as follows (dollars in thousands):
September 30, 2019
December 31, 2018
Outstanding principal balance
$
437,461
$
63,619
Carrying amount
420,066
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):
September 30, 2019
December 31, 2018
Outstanding principal balance
$
59,353
$
24,500
Carrying amount
48,733
20,611
The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies ASC 310-30, for the nine months ended September 30, 2019 and the year ended December 31, 2018 (dollars in thousands):
September 30, 2019
December 31, 2018
Balance at January 1
$
4,633
$
4,890
Additions from merger with HomeTown
4,410
—
Accretion
(2,436
)
(2,362
)
Reclassification from nonaccretable difference
389
956
Other changes, net*
506
1,149
$
7,502
$
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 September 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
$
776
$
121
$
39
$
110
$
1,046
$
323,462
$
324,508
Commercial real estate:
Construction and land development
—
—
—
21
21
143,767
143,788
Commercial real estate
865
483
136
299
1,783
881,436
883,219
Residential:
Residential
976
5
648
845
2,474
316,359
318,833
Home equity
321
95
51
171
638
121,436
122,074
Consumer
70
14
—
—
84
11,941
12,025
Total
$
3,008
$
718
$
874
$
1,446
$
6,046
$
1,798,401
$
1,804,447
18
The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2018 (dollars in thousands):