Form 10-Q
Table of Contents

 

 

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, 2014

or

 

¨ 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: 001-32590

 

 

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   20-2652949

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9954 Mayland Drive, Suite 2100  
Richmond, Virginia   23233
(Address of principal executive offices)   (Zip Code)

(804) 934-9999

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At June 30, 2014, there were 21,750,841 shares of the Company’s common stock outstanding.

 

 

 


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

June 30, 2014

 

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets

     3   

Unaudited Consolidated Statements of Income

     4   

Unaudited Consolidated Statements of Comprehensive Income (Loss)

     5   

Unaudited Consolidated Statements of Shareholders’ Equity

     6   

Unaudited Consolidated Statements of Cash Flows

     7   

Notes to Unaudited Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4. Controls and Procedures

     50   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     51   

Item 1A. Risk Factors

     51   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     51   

Item 3. Defaults upon Senior Securities

     51   

Item 4. Mine Safety Disclosures

     51   

Item 5. Other Information

     51   

Item 6. Exhibits

     51   

SIGNATURES

     52   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2014 AND DECEMBER 31, 2013

(dollars in thousands)

 

     June 30, 2014     December 31, 2013  
     (Unaudited)     (Audited)  

ASSETS

  

Cash and due from banks

   $ 13,865      $ 10,857   

Interest bearing bank deposits

     11,029        12,978   
  

 

 

   

 

 

 

Total cash and cash equivalents

     24,894        23,835   

Securities available for sale, at fair value

     266,772        265,777   

Securities held to maturity, at cost (fair value of $27,782 and $30,305, respectively)

     26,183        28,563   

Equity securities, restricted, at cost

     7,855        8,358   
  

 

 

   

 

 

 

Total securities

     300,810        302,698   

Loans held for sale

     —          100   

Loans not covered by FDIC shared-loss agreements

     632,343        596,173   

Loans covered by FDIC shared-loss agreements

     65,932        73,275   
  

 

 

   

 

 

 

Total loans

     698,275        669,448   

Allowance for loan losses (non-covered loans of $10,254 and $10,444, respectively; covered loans of $386 and $484, respectively)

     (10,640     (10,928
  

 

 

   

 

 

 

Net loans

     687,635        658,520   

FDIC indemnification asset

     22,219        25,409   

Bank premises and equipment, net

     25,772        27,872   

Bank premises and equipment held for sale

     3,237        —     

Other real estate owned, covered by FDIC shared-loss agreements

     2,967        2,692   

Other real estate owned, non-covered

     6,390        6,244   

Bank owned life insurance

     21,118        20,795   

FDIC receivable under shared-loss agreements

     594        368   

Core deposit intangibles, net

     5,667        6,621   

Other assets

     13,516        14,378   
  

 

 

   

 

 

 

Total assets

   $ 1,114,819      $ 1,089,532   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest bearing

   $ 78,744      $ 70,132   

Interest bearing

     836,072        822,209   
  

 

 

   

 

 

 

Total deposits

     914,816        892,341   

Federal funds purchased and securities sold under agreements to repurchase

     2,540        6,000   

Federal Home Loan Bank advances

     76,766        77,125   

Long-term debt

     10,680        —     

Trust preferred capital notes

     4,124        4,124   

Other liabilities

     3,804        3,283   
  

 

 

   

 

 

 

Total liabilities

     1,012,730        982,873   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred stock (5,000,000 shares authorized, $0.01 par value; 0 and 10,680 shares issued and outstanding, respectively)

     —          10,680   

Warrants on preferred stock

     —          1,037   

Common stock (200,000,000 shares authorized, $0.01 par value; 21,750,841 and 21,709,096 shares issued and outstanding, respectively)

     218        217   

Additional paid in capital

     145,096        144,656   

Retained deficit

     (42,625     (45,822

Accumulated other comprehensive loss

     (600     (4,109
  

 

 

   

 

 

 

Total shareholders’ equity

     102,089        106,659   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,114,819      $ 1,089,532   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

3


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(dollars and shares in thousands, except per share data)

 

     Three months ended      Six months ended  
     June 30, 2014      June 30, 2013      June 30, 2014      June 30, 2013  

Interest and dividend income

           

Interest and fees on non-covered loans

   $ 7,291       $ 7,622       $ 14,342       $ 15,133   

Interest and fees on FDIC covered loans

     3,264         2,745         6,225         5,404   

Interest on federal funds sold

     —           1         —           3   

Interest on deposits in other banks

     22         14         35         22   

Interest and dividends on securities

           

Taxable

     1,710         1,945         3,408         3,783   

Nontaxable

     168         164         324         312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     12,455         12,491         24,334         24,657   

Interest expense

           

Interest on deposits

     1,453         1,600         2,861         3,301   

Interest on short-term borrowings

     1         2         2         3   

Interest on other borrowed funds

     243         189         404         381   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,697         1,791         3,267         3,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     10,758         10,700         21,067         20,972   

Provision for loan losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     10,758         10,700         21,067         20,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

           

Service charges on deposit accounts

     561         701         1,050         1,364   

Gain on securities transactions, net

     24         130         379         408   

Gain on sale of other loans, net

     27         —           75         —     

Income on bank owned life insurance

     193         199         385         348   

Other

     165         308         382         544   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     970         1,338         2,271         2,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense

           

Salaries and employee benefits

     4,028         3,901         7,951         7,894   

Occupancy expenses

     687         717         1,335         1,380   

Equipment expenses

     260         247         479         514   

Legal fees

     29         38         57         51   

Professional fees

     135         139         242         189   

FDIC assessment

     194         223         401         390   

Data processing fees

     463         551         957         1,088   

FDIC indemnification asset amortization

     1,478         1,592         2,976         3,093   

Amortization of intangibles

     477         566         954         1,131   

Other real estate expense

     100         502         383         1,239   

Other operating expenses

     1,508         1,282         2,801         2,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     9,359         9,758         18,536         19,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,369         2,280         4,802         4,167   

Income tax expense

     649         673         1,358         1,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,720       $ 1,607       $ 3,444       $ 2,931   

Dividends paid on preferred stock

     182         221         247         442   

Accretion of discount on preferred stock

     —           59         —           117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 1,538       $ 1,327       $ 3,197       $ 2,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — basic

   $ 0.07       $ 0.06       $ 0.15       $ 0.11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — diluted

   $ 0.07       $ 0.06       $ 0.15       $ 0.11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

           

basic

     21,742         21,696         21,736         21,689   

diluted

     21,939         21,835         21,972         21,858   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(dollars in thousands)

 

     Three months ended     Six months ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Net income

   $ 1,720      $ 1,607      $ 3,444      $ 2,931   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Change in unrealized (loss) gain in investment securities

     1,950        (7,402     5,696        (7,353

Tax related to unrealized loss (gain) in investment securities

     (663     2,517        (1,937     2,500   

Reclassification adjustment for gain in securities sold

     (24     (130     (379     (408

Tax related to realized gain in securities sold

     8        44        129        139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,271        (4,971     3,509        (5,122
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 2,991      $ (3,364   $ 6,953      $ (2,191
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

5


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(dollars and shares in thousands)

 

     Preferred           Discount
on Preferred
    Common Stock      Additional
Paid in
     Retained     Accumulated
Other
Comprehensive
       
     Stock     Warrants     Stock     Shares      Amount      Capital      Deficit     Income     Total  

Balance January 1, 2013

   $ 17,680     $ 1,037     $ (234 )     21,670       $ 217      $ 144,398       $ (50,609 )   $ 2,828     $ 115,317   

Amortization of preferred stock warrants

     —          —          117        —           —           —           (117     —          —     

Issuance of common stock

     —          —          —          23         —           65         —          —          65   

Dividends paid on preferred stock

     —          —          —          —           —           —           (442     —          (442

Issuance of stock options

     —          —          —          —           —           69         —          —          69   

Net income

     —          —          —          —           —           —           2,931        —          2,931   

Other comprehensive loss

     —          —          —          —           —           —           —          (5,122 )     (5,122
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance June 30, 2013

   $ 17,680      $ 1,037      $ (117     21,693       $ 217       $ 144,532       $ (48,237   $ (2,294   $ 112,818   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance January 1, 2014

   $ 10,680     $ 1,037     $ —          21,709       $ 217      $ 144,656       $ (45,822 )   $ (4,109 )   $ 106,659  

Issuance of common stock

     —          —          —          42         1         90         —          —          91   

Dividends paid on preferred stock

     —          —          —          —           —           —           (247     —          (247

Issuance of stock options

     —          —          —          —           —           93         —          —          93   

Redemption of preferred stock

     (10,680     —          —          —           —           —           —          —          (10,680

Redemption of warrants on preferred stock

     —          (1,037     —          —           —           257         —          —          (780

Net income

     —          —          —          —           —           —           3,444        —          3,444   

Other comprehensive income

     —          —          —          —           —           —           —          3,509        3,509   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

   $ —        $ —        $ —          21,751       $ 218       $ 145,096       $ (42,625   $ (600   $ 102,089   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(dollars in thousands)

 

     June 30, 2014     June 30, 2013  

Operating activities:

    

Net income

   $ 3,444      $ 2,931   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and intangibles amortization

     1,728        1,980   

Issuance of common stock and stock options

     184        134   

Amortization of purchased loan premium

     727        598   

Deferred tax expense

     —          1,236   

Amortization of security premiums and accretion of discounts, net

     1,840        1,826   

Net gain on sale of securities

     (379     (408

Net loss on sale and valuation of other real estate owned

     314        1,048   

Net gain on sale of loans

     (75     —     

Changes in assets and liabilities:

    

Decrease in loans held for sale

     100        713   

Decrease in other assets

     1,695        5,870   

Increase (decrease) in accrued expenses and other liabilities

     521        (51
  

 

 

   

 

 

 

Net cash provided by operating activities

     10,099        15,877   
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from available for sale securities

     68,160        115,760   

Proceeds from held to maturity securities

     3,602        6,390   

Proceeds from equity securities

     586        254   

Purchase of available for sale securities

     (66,522     (93,840

Purchase of equity securities

     (82     (85

Proceeds from sale of other real estate

     1,379        4,545   

Improvements of other real estate, net of insurance proceeds

     (178     (186

Net increase in loans

     (37,283     (16,263

Principal recoveries of loans previously charged off

     310        813   

Purchase of premises and equipment, net

     (1,915     (536

Purchase of bank owned life insurance investment

     —          (5,000

Proceeds from sale of loans

     5,274        —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (26,669     11,852   
  

 

 

   

 

 

 

Financing activities:

    

Net increase (decrease) in noninterest bearing and interest bearing demand deposits

     22,475        (21,410

Net decrease in federal funds purchased

     (3,460     (4,412

Net decrease in Federal Home Loan Bank borrowings

     (359     (349

Cash dividends paid

     (247     (442

Proceeds from long-term debt

     10,680        —     

Redemption of preferred stock and related warrants

     (11,460     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,629        (26,613

Net increase in cash and cash equivalents

     1,059        1,116   

Cash and cash equivalents:

    

Beginning of the period

   $ 23,835      $ 24,137   
  

 

 

   

 

 

 

End of the period

   $ 24,894      $ 25,253   
  

 

 

   

 

 

 
     June 30, 2014     June 30, 2013  

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 3,141      $ 3,818   

Income taxes paid

     1,364        —     

Transfers to other real estate owned

     1,932        1,241   

Transfer of building premises and equipment to held for sale

     3,237        —     

Transfer of portfolio loans to held for sale

     —          5,100   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

1. NATURE OF BANKING ACITIVIES AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Community Bankers Trust Corporation (the “Company”) is a bank holding company that was originally incorporated in 2005. On January 1, 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to Virginia. The form of the reincorporation was the merger of the then existing Delaware corporation into a newly created Virginia corporation. The Company retained the same name and conducts business in the same manner as before the reincorporation.

The Company is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 21 full-service offices, 14 of which are in Virginia and seven of which are in Maryland. The Bank also operates two loan production offices in Virginia. The Company relocated its corporate headquarters on March 31, 2014. The Bank opened a new branch office in Annapolis, Maryland on March 25, 2014 and a branch office at its new headquarters in Richmond, Virginia on April 7, 2014.

The Bank was established in 1926. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

Financial Statements

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of June 30, 2014, statements of shareholders’ equity and cash flows for the six months ended June 30, 2014, and statements of income statement and comprehensive income for the three and six months ended June 30, 2014. Results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

Certain reclassifications have been made to prior period balances to conform to the current period presentation.

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Although current guidance indicates that a creditor should reclassify a collateralized mortgage loan as other real estate owned when it determines that there has been in substance a repossession or foreclosure by the creditor, that is, the creditor receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place, the terms in substance a repossession or foreclosure and physical possession are not defined in the accounting literature. This has resulted in diversity about when a creditor should derecognize the loan receivable and recognize the real estate property. The objective of the amendments in this update is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs. The amendments state that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted. The Company currently records foreclosures in accordance with this guidance; therefore, no changes are necessary for adoption.

Also in January 2014, the FASB issued ASU No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. Currently, an investor that invests in a qualified affordable housing project may elect to account for that investment using the effective yield method. Those not electing the effective yield method would account for the investment using the equity method or cost method. The Task Force received stakeholder feedback indicating that certain of the required conditions for the effective yield method are overly restrictive and thus prevent many investments in qualified affordable housing projects from qualifying for the use of this method. Those stakeholders stated that presenting the investment performance net of taxes as a component of income tax expense (benefit) as prescribed by the effective yield method more fairly represents the economics and provides users with a better understanding of the returns from such investments than the equity or cost methods.

The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. A reporting entity should disclose information that enables users of its financial statements to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations. The amendments in this ASU should be applied retrospectively to all periods presented. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

2. SECURITIES

Amortized costs and fair values of securities available for sale and held to maturity at June 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

 

     June 30, 2014  
            Gross Unrealized        
     Amortized
Cost
     Gains      Losses     Fair Value  

Securities Available for Sale

  

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 87,032       $ 101       $ (1,223   $ 85,910   

State, county and municipal

     136,708         2,792         (2,215     137,285   

Corporate and other bonds

     12,104         31         (43     12,092   

Mortgage backed – U.S. Gov’t agencies

     2,598         25         (104     2,519   

Mortgage backed – U.S. Gov’t sponsored agencies

     29,004         61         (99     28,966   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Available for Sale

   $ 267,446       $ 3,010       $ (3,684   $ 266,772   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

State, county and municipal

   $ 10,364       $ 714       $ —        $ 11,078   

Mortgage backed – U.S. Gov’t agencies

     5,504         324         —          5,828   

Mortgage backed – U.S. Gov’t sponsored agencies

     10,315         561         —          10,876   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 26,183       $ 1,599       $ —        $ 27,782   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2013  
            Gross Unrealized        
     Amortized
Cost
     Gains      Losses     Fair Value  

Securities Available for Sale

  

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 99,789       $ 165       $ (967   $ 98,987   

U.S. Gov’t sponsored agencies

     487         —           (1     486   

State, county and municipal

     138,884         1,297         (6,085     134,096   

Corporate and other bonds

     6,369         27         (47     6,349   

Mortgage backed – U.S. Gov’t agencies

     3,608         29         (198     3,439   

Mortgage backed – U.S. Gov’t sponsored agencies

     22,631         69         (280     22,420   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Available for Sale

   $ 271,768       $ 1,587       $ (7,578   $ 265,777   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

State, county and municipal

   $ 9,385       $ 718       $ —        $ 10,103   

Mortgage backed – U.S. Gov’t agencies

     6,604         398         —          7,002   

Mortgage backed – U.S. Gov’t sponsored agencies

     12,574         626         —          13,200   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 28,563       $ 1,742       $ —        $ 30,305   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of securities at June 30, 2014 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties (dollars in thousands):

 

     Held to Maturity      Available for Sale  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due in one year or less

   $ 1,722       $ 1,739       $ 4,446       $ 4,426   

Due after one year through five years

     22,130         23,581         49,348         49,732   

Due after five years through ten years

     1,030         1,161         144,356         144,623   

Due after ten years

     1,301         1,301         69,296         67,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 26,183       $ 27,782       $ 267,446       $ 266,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Proceeds from sales of securities available for sale were $22.9 million and $29.4 million during the three months ended June 30, 2014 and 2013, respectively, and $44.6 million and $54.6 million during the six months ended June 30, 2014 and 2013, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the periods were as follows (dollars in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Gross realized gains

   $ 90      $ 145      $ 496      $ 470   

Gross realized losses

     (66     (15     (117     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net securities gains

   $ 24      $ 130      $ 379      $ 408   
  

 

 

   

 

 

   

 

 

   

 

 

 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three and six months ended June 30, 2014 and 2013.

The fair value and gross unrealized losses for securities available for sale, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at June 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

 

     June 30, 2014  
     Less than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss  

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 35,124       $ (565   $ 38,551       $ (658   $ 73,675       $ (1,223

State, county and municipal

     3,488         (24     61,989         (2,191     65,477         (2,215

Corporate and other bonds

     4,413         (43     —           —          4,413         (43

Mortgage backed – U.S. Gov’t agencies

     —           —          1,893         (104     1,893         (104

Mortgage backed – U.S. Gov’t sponsored agencies

     12,337         (76     3,824         (23     16,161         (99
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 55,362       $ (708   $ 106,257       $ (2,976   $ 161,619       $ (3,684
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2013  
     Less than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss  

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 35,873       $ (531   $ 37,638       $ (436   $ 73,511       $ (967

U.S. Gov’t sponsored agencies

     486         (1     —           —          486         (1

State, county and municipal

     92,010         (5,343     6,445         (742     98,455         (6,085

Corporate and other bonds

     3,332         (42     991         (5     4,323         (47

Mortgage backed – U.S. Gov’t agencies

     2,767         (198     —           —          2,767         (198

Mortgage backed – U.S. Gov’t sponsored agencies

     14,572         (258     1,557         (22     16,129         (280
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 149,040       $ (6,373   $ 46,631       $ (1,205   $ 195,671       $ (7,578
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses (impairments) in the investment portfolio at June 30, 2014 and December 31, 2013 are generally a result of market fluctuations that occur daily. The unrealized losses are from 194 securities at June 30, 2014. Of those, 188 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. Six investment grade corporate obligations comprise the remaining securities with unrealized losses at June 30, 2014. The Company considers the reason for impairment, length of impairment and ability to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell and it is more likely than not that the Company will not be required to sell these securities until they recover in value.

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

Securities with amortized costs of $60.9 million and $109.1 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At each of June 30, 2014 and December 31, 2013, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

3. LOANS NOT COVERED BY FDIC SHARED-LOSS AGREEMENT (NON-COVERED LOANS) AND RELATED ALLOWANCE FOR LOAN LOSSES

The Company’s non-covered loans at June 30, 2014 and December 31, 2013 were comprised of the following (dollars in thousands):

 

     June 30, 2014     December 31, 2013  
     Amount     % of Non-
Covered Loans
    Amount     % of Non-
Covered Loans
 

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 156,173        24.69   $ 144,382        24.21

Commercial

     275,286        43.52        247,284        41.47   

Construction and land development

     59,385        9.39        55,278        9.27   

Second mortgages

     6,459        1.02        6,854        1.15   

Multifamily

     33,898        5.36        35,774        6.00   

Agriculture

     8,127        1.28        9,565        1.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     539,328        85.26        499,137        83.70   

Commercial loans

     86,446        13.67        90,142        15.12   

Consumer installment loans

     5,379        0.85        5,623        0.94   

All other loans

     1,390        0.22        1,435        0.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     632,543        100.00     596,337        100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Less unearned income on loans

     (200       (164  
  

 

 

     

 

 

   

Non-covered loans, net of unearned income

   $ 632,343        $ 596,173     
  

 

 

     

 

 

   

The Company held $26.7 million and $38.5 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at June 30, 2014 and December 31, 2013, respectively. As these loans are 100% guaranteed by the USDA, no loan loss provision is required. These loan balances included an unamortized purchase premium of $1.6 million and $2.5 million at June 30, 2014 and December 31, 2013, respectively. Unamortized purchase premium is recognized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method.

At June 30, 2014 and December 31, 2013, the Company’s allowance for credit losses was comprised of the following: (i) specific valuation allowances calculated in accordance with FASB ASC 310, Receivables, (ii) general valuation allowances calculated in accordance with FASB ASC 450, Contingencies, based on economic conditions and other qualitative risk factors, and (iii) historical valuation allowances calculated using historical loan loss experience. Management identified loans subject to impairment in accordance with ASC 310.

The Purchase and Assumption Agreement into which the Company and the Federal Deposit Insurance Corporation (FDIC) entered in January 2009 that provided for the Company’s assumption of all of the deposits and certain other liabilities and acquisition of substantially all assets of Suburban Federal Savings Bank (SFSB) included two shared-loss agreements with respect to certain covered loans and foreclosed real estate assets. See Notes 4 and 5 for more information on the Purchase and Assumption Agreement and the shared-loss agreements. The shared-loss agreement for loans other than those secured by single family, residential 1-4 family mortgages expired March 31, 2014. These loans, which had an outstanding principal balance of $10.0 million and a carrying value of $5.5 million at March 31, 2014, are being accounted for in accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, commonly referred to as purchased credit impaired loans, and were classified as non-covered loans effective April 1, 2014 (the “PCI loans”).

The PCI loans were not classified as nonperforming assets as of June 30, 2014, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table reflects the outstanding principal balance and carrying amounts of the PCI loans as of June 30, 2014 (dollars in thousands):

 

     June 30, 2014  
     Unpaid balance      Carrying Value  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 2,218       $ 1,019   

Commercial

     3,290         1,244   

Construction and land development

     4,085         2,896   

Second mortgages

     37         19   

Multifamily

     —          —    

Agriculture

     —          —    
  

 

 

    

 

 

 

Total real estate loans

     9,630         5,178   
  

 

 

    

 

 

 

Total PCI loans

   $ 9,630       $ 5,178   
  

 

 

    

 

 

 

The allowance for loan losses related to PCI loans was $98,000 as of March 31, 2014 and was transferred from the allowance for loan losses on covered loans effective April 1, 2014. This allowance was related to commercial real estate loans. There was no other activity in the allowance for loan losses related to PCI loans for either of the three or the six month periods ended June 30, 2014.

The change in the accretable yield balance for the PCI loans for the three months ended June 30, 2014 (dollars in thousands):

 

Balance transferred from covered loans, April 1, 2014

   $ 4,773   

Accretion

     (187

Reclassification from nonaccretable yield

     808   
  

 

 

 

Balance, June 30, 2014

   $ 5,394   
  

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes information related to impaired loans as of June 30, 2014 (dollars in thousands):

 

     Recorded
Investment (1)
     Unpaid Principal
Balance (2)
     Related Allowance  

With an allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 3,493       $ 3,620       $ 911   

Commercial

     542         714         101   

Construction and land development

     4,168         5,320         512   

Second mortgages

     223         226         41   

Multifamily

     —          —          —    

Agriculture

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     8,426         9,880         1,565   

Commercial loans

     36         683         7   

Consumer installment loans

     91         93         17   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans with a valuation allowance

     8,553         10,656         1,589   
  

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     1,447         1,513         —    

Commercial

     455         562         —    

Construction and land development

     1,169         3,022         —    

Second mortgages

     —          —          —    

Multifamily

     —          —          —    

Agriculture

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     3,071         5,097         —    

Commercial loans

     —          —          —    

Consumer installment loans

     5         6         —    

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans without a valuation allowance

     3,076         5,103         —    
  

 

 

    

 

 

    

 

 

 

Total:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     4,940         5,133         911   

Commercial

     997         1,276         101   

Construction and land development

     5,337         8,342         512   

Second mortgages

     223         226         41   

Multifamily

     —          —          —    

Agriculture

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     11,497         14,977         1,565   

Commercial loans

     36         683         7   

Consumer installment loans

     96         99         17   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 11,629       $ 15,759       $ 1,589   
  

 

 

    

 

 

    

 

 

 

 

(1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment
(2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes information related to impaired loans as of December 31, 2013 (dollars in thousands):

 

     Recorded
Investment (1)
     Unpaid Principal
Balance (2)
     Related Allowance  

With an allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 3,485       $ 3,739       $ 881   

Commercial

     920         1,091         150   

Construction and land development

     4,148         5,298         508   

Second mortgages

     225         226         40   

Multifamily

     —          —          —    

Agriculture

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     8,778         10,354         1,579   

Commercial loans

     127         794         16   

Consumer installment loans

     49         51         9   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans with a valuation allowance

     8,954         11,199         1,604   
  

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     1,189         1,228         —    

Commercial

     1,714         1,969         —    

Construction and land development

     1,734         4,335         —    

Second mortgages

     —           —           —    

Multifamily

     —          —          —    

Agriculture

     204         222         —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     4,841         7,754         —    

Commercial loans

     —           —           —    

Consumer installment loans

     6         6         —    

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans without a valuation allowance

     4,847         7,760         —    
  

 

 

    

 

 

    

 

 

 

Total:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     4,674         4,967         881   

Commercial

     2,634         3,060         150   

Construction and land development

     5,882         9,633         508   

Second mortgages

     225         226         40   

Multifamily

     —          —          —    

Agriculture

     204         222         —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     13,619         18,108         1,579   

Commercial loans

     127         794         16   

Consumer installment loans

     55         57         9   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 13,801       $ 18,959       $ 1,604   
  

 

 

    

 

 

    

 

 

 

 

(1) The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment
(2) The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes average recorded investment of impaired loans for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

     Three months ended      Six months ended  
     June 30, 2014      June 30, 2013      June 30, 2014      June 30, 2013  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 4,813       $ 6,327       $ 4,807       $ 6,092   

Commercial

     2,228         3,270         1,815         4,252   

Construction and land development

     5,622         8,801         5,609         8,728   

Second mortgages

     224         165         224         166   

Multifamily

     —           —           —           —     

Agriculture

     —           229         102         237   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     12,887         18,792         12,557         19,475   

Commercial loans

     46         199         82         312   

Consumer installment loans

     97         77         76         74   

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 13,030       $ 19,068       $ 12,715       $ 19,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

The majority of impaired loans are also nonaccruing for which no interest income was recognized during each of the three and six months ended June 30, 2014 and 2013. No significant amounts of interest income were recognized on accruing impaired loans for each of the three and six months ended June 30, 2014 and 2013.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. Cash basis income of $158,000 and $297,000 was recognized during the three and six months ended June 30, 2014, respectively. There were no significant amounts recognized during either of the three or six months ended June 30, 2013. For the three months ended June 30, 2014 and 2013, estimated interest income of $230,000 and $298,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the six months ended June 30, 2014 and 2013, estimated interest income of $454,000 and $590,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

The following table presents non-covered nonaccrual loans, excluding PCI loans, by loan category as of June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 4,617       $ 4,229   

Commercial

     874         1,382   

Construction and land development

     5,337         5,882   

Second mortgages

     223         225   

Multifamily

     —          —    

Agriculture

     —          205   
  

 

 

    

 

 

 

Total real estate loans

     11,051         11,923   

Commercial loans

     36         127   

Consumer installment loans

     96         55   

All other loans

     —          —    
  

 

 

    

 

 

 

Total loans

   $ 11,183       $ 12,105   
  

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Troubled debt restructures still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at June 30, 2014 and December 31, 2013, is set forth in the table below (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Nonaccruals

   $ 11,183       $ 12,105   

Trouble debt restructure and still accruing

     446         1,696   
  

 

 

    

 

 

 

Total impaired

   $ 11,629       $ 13,801   
  

 

 

    

 

 

 

The following tables present an age analysis of past due status of non-covered loans, excluding PCI loans, by category as of June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014  
     30-89
Days
Past
Due
     90 Days
Past Due
     Total
Past Due
     Current      Total Loans      Recorded
Investment
90 Days
Past Due
and
Accruing
 

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 957       $ 4,617       $ 5,574       $ 149,580       $ 155,154       $ —    

Commercial

     328         874         1,202         272,840         274,042         —    

Construction and land development

     28         5,337         5,365         51,124         56,489         —    

Second mortgages

     —          223         223         6,217         6,440         —    

Multifamily

     —          —          —          33,898         33,898         —    

Agriculture

     —          —          —          8,127         8,127         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,313         11,051         12,364         521,786         534,150         —    

Commercial loans

     191         36         227         86,219         86,446         —    

Consumer installment loans

     11         96         107         5,272         5,379         —    

All other loans

     —          —          —          1,390         1,390         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,515       $ 11,183       $ 12,698       $ 614,667       $ 627,365       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     30-89
Days
Past
Due
     90 Days
Past Due
     Total
Past Due
     Current      Total Loans      Recorded
Investment
90 Days
Past Due
and
Accruing
 

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,455       $ 4,229       $ 5,684       $ 138,698       $ 144,382       $ —    

Commercial

     —           1,382         1,382         245,902         247,284         —     

Construction and land development

     242         5,882         6,124         49,154         55,278         —    

Second mortgages

     —           225         225         6,629         6,854         —    

Multifamily

     —          —          —          35,774         35,774         —    

Agriculture

     —          205         205         9,360         9,565         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,697         11,923         13,620         485,517         499,137         —     

Commercial loans

     115         127         242         89,900         90,142         —    

Consumer installment loans

     58         55         113         5,510         5,623         —    

All other loans

     —          —          —          1,435         1,435         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,870       $ 12,105       $ 13,975       $ 582,362       $ 596,337       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Activity in the allowance for loan losses on non-covered loans, excluding PCI loans, by segment for the periods presented is presented in the following tables (dollars in thousands):

 

     Three Months Ended June 30, 2014  
     Beginning of
Period
     Provision
Allocation
    Charge-offs     Recoveries      End of Period  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 3,707       $ (77   $ —       $ 40       $ 3,670   

Commercial

     2,964         355        (412 )     12         2,919   

Construction and land development

     1,894            (270     —         —          1,624   

Second mortgages

     114         (17     —         1         98   

Multifamily

     208         (32     —         —          176   

Agriculture

     57         7        —         —          64   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     8,944         (34     (412 )     53         8,551   

Commercial loans

     1,332         31        —         115         1,478   

Consumer installment loans

     110         2        (34     24         102   

All other loans

     24         1       —         —          25   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 10,410       $ —       $ (446   $ 192       $ 10,156   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended June 30, 2013  
     Beginning of
Period
     Provision
Allocation
    Charge-offs     Recoveries      End of Period  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 4,008       $ 52      $ (127   $ 5       $ 3,938   

Commercial

     2,414         1,002        (913     5         2,508   

Construction and land development

     3,357         (862     (157     527         2,865   

Second mortgages

     105         (34     —         1         72   

Multifamily

     316         (170     —         —          146   

Agriculture

     62         —          (6 )     —          56   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     10,262         (12     (1,203     538         9,585   

Commercial loans

     1,816         (17     (45     18         1,772   

Consumer installment loans

     152         32        (54     11         141   

All other loans

     28         (3 )     —         —          25   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 12,258       $ —       $ (1,302   $ 567       $ 11,523   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30, 2014  
     Beginning of
Period
     Provision
Allocation
    Charge-offs     Recoveries      End of Period  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 3,853       $ (120   $ (110   $ 47       $ 3,670   

Commercial

     2,333         917        (412     81         2,919   

Construction and land development

     2,252         (629     —         1         1,624   

Second mortgages

     101         (5     —         2         98   

Multifamily

     151         25        —         —          176   

Agriculture

     81         (17     —         —          64   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     8,771         171        (522     131         8,551   

Commercial loans

     1,546         (187     —         119         1,478   

Consumer installment loans

     101         17        (76     60         102   

All other loans

     26         (1     —         —          25   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 10,444       $ —       $ (598   $ 310       $ 10,156   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     Six Months Ended June 30, 2013  
     Beginning of
Period
     Provision
Allocation
    Charge-offs     Recoveries      End of Period  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 3,985       $ 63      $ (161   $ 51      $ 3,938   

Commercial

     2,482         1,508        (1,492     10         2,508   

Construction and land development

     3,773         (1,427     (157     676         2,865   

Second mortgages

     142         (75     —         5         72   

Multifamily

     303         (157     —         —          146   

Agriculture

     61         1        (6 )     —          56   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     10,746         (87     (1,816     742         9,585   

Commercial loans

     1,961         69        (297     39         1,772   

Consumer installment loans

     195         11        (97     32         141   

All other loans

     18         7        —         —          25   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 12,920       $ —        $ (2,210   $ 813       $ 11,523   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present information on the non-covered loans evaluated for impairment in the allowance for loan losses as of June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014  
     Allowance for Loan Losses  
     Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Related to PCI
loans
     Total  

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 961       $ 2,709       $ —        $ 3,670   

Commercial

     108         2,811         98         3,017   

Construction and land development

     540         1,084         —          1,624   

Second mortgages

     45         53         —          98   

Multifamily

     —          176         —          176   

Agriculture

     —          64         —          64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,654         6,897         98         8,649   

Commercial loans

     417         1,061         —          1,478   

Consumer installment loans

     18         84         —          102   

All other loans

     —          25         —          25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $   2,089       $     8,067       $      98       $   10,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     June 30, 2014  
     Recorded Investment in Loans  
     Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Related to PCI
loans
     Total  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 7,262       $ 147,892       $ 1,019       $ 156,173   

Commercial

     9,400         264,642         1,244         275,286   

Construction and land development

     5,849         50,640         2,896         59,385   

Second mortgages

     252         6,188         19         6,459   

Multifamily

     —          33,898         —          33,898   

Agriculture

     —          8,127         —          8,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     22,763         511,387         5,178         539,328   

Commercial loans

     9,117         77,329         —          86,446   

Consumer installment loans

     102         5,277         —          5,379   

All other loans

     —          1,390         —          1,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 31,982       $ 595,383       $ 5,178       $ 632,543   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Allowance for Loan Losses      Recorded Investment in Loans  
     Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Total      Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 923       $ 2,930       $ 3,853       $ 6,708       $ 137,674       $ 144,382   

Commercial

     200         2,133         2,333         8,016         239,268         247,284   

Construction and land development

     651         1,601         2,252         8,619         46,659         55,278   

Second mortgages

     42         59         101         254         6,600         6,854   

Multifamily

     —          151         151         —          35,774         35,774   

Agriculture

     —          81         81         205         9,360         9,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,816         6,955         8,771         23,802         475,335         499,137   

Commercial loans

     18         1,528         1,546         192         89,950         90,142   

Consumer installment loans

     9         92         101         57         5,566         5,623   

All other loans

     —           26         26         —           1,435         1,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,843       $ 8,601       $ 10,444       $ 24,051       $ 572,286       $ 596,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The category “Individually Evaluated for Impairment” includes loans individually evaluated for impairment and determined not to be impaired. These loans totalled $20.4 million and $10.3 million at June 30, 2014 and December 31, 2013, respectively. The allowance for loans losses allocated to these loans was $500,000 and $239,000 at June 30, 2014 and December 31, 2013, respectively.

Non-covered loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $26.7 million and $38.5 million at June 30, 2014 and December 31, 2013, respectively.

Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

The following tables present the composition of non-covered loans, excluding PCI loans, by credit quality indicator at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 139,621       $ 9,551       $ 5,982       $ —         $ 155,154   

Commercial

     255,148         13,127         5,767         —           274,042   

Construction and land development

     50,421         219         5,849         —           56,489   

Second mortgages

     5,238         951         251         —           6,440   

Multifamily

     33,898         —           —           —           33,898   

Agriculture

     8,127         —           —           —           8,127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     492,453         23,848         17,849         —           534,150   

Commercial loans

     74,994         2,335         9,117         —           86,446   

Consumer installment loans

     5,250         29         100         —           5,379   

All other loans

     1,390         —           —           —           1,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 574,087       $ 26,212       $ 27,066       $ —         $ 627,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 129,482       $ 8,193       $ 6,707       $ —         $ 144,382   

Commercial

     229,168         11,348         6,768         —           247,284   

Construction and land development

     44,482         2,178         8,618         —           55,278   

Second mortgages

     6,172         428         254         —           6,854   

Multifamily

     35,774         —           —          —           35,774   

Agriculture

     9,361         —           204         —           9,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     454,439         22,147         22,551         —           499,137   

Commercial loans

     87,208         2,742         192         —           90,142   

Consumer installment loans

     5,344         222         57         —           5,623   

All other loans

     1,435         —          —          —           1,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 548,426       $ 25,111       $ 22,800       $ —         $ 596,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with FASB ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance.

During the three and six months ended June 30, 2014, there were no loans modified, that were considered to be TDRs. During each of the three and six months ended June 30, 2013, the Company modified one residential 1-4 family loan that was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre- and post-modification balance of $174,000.

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during the three and six months ended June 30, 2014 and 2013.

In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement.

At June 30, 2014 the Company had 1-4 family mortgages in the amount of $144.8 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $108.4 million.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

4. LOANS COVERED BY FDIC SHARED-LOSS AGREEMENTS (COVERED LOANS) AND RELATED ALLOWANCE FOR LOAN LOSSES

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of the deposits and certain other liabilities and acquire substantially all assets of SFSB. The Company is applying the provisions of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “covered loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

The shared-loss agreement related to loans other than those secured by single family, residential 1-4 family mortgages expired March 31, 2014. These loans, which had an outstanding principal balance of $10.0 million and a carrying value of $5.5 million at March 31, 2014, were transferred to non-covered loans effective April 1, 2014 (the “PCI loans”). See Note 3 for further details.

As of June 30, 2014 and December 31, 2013, the outstanding contractual balance of the covered loans was $101.2 million and $117.0 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

     June 30, 2014     December 31, 2013  
     Amount      % of
Covered
Loans
    Amount      % of
Covered
Loans
 

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 62,044         94.10   $ 64,610         88.18

Commercial

     —           —          1,389         1.90   

Construction and land development

     —           —          2,940         4.01   

Second mortgages

     3,617         5.49        3,898         5.32   

Multifamily

     271         0.41        266         0.36   

Agriculture

     —           —          172         0.23   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     65,932         100.00        73,275         100.00   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total covered loans

   $ 65,932         100.00   $ 73,275         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The allowance for loan losses related to the PCI loans of $98,000 was transferred to the non-covered allowance for loan losses effective April 1, 2014, and was related to commercial real estate loans. The remaining allowance for loan losses on covered loans of $386,000 at June 30, 2014, related to residential 1-4 family loans. There was no other activity in the allowance for loan losses on covered loans for either the three or six months ended June 30, 2014. There was no activity in the allowance for loan losses on covered loans for either the three or six months ended June 30, 2013.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table presents information on the covered loans collectively evaluated for impairment in the allowance for loan losses at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014      December 31, 2013  
     Allowance for
loan losses
     Recorded
investment
in loans
     Allowance for
loan losses
     Recorded
investment
in loans
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 386       $ 62,044       $ 252       $ 64,610   

Commercial

     —           —           232         1,389   

Construction and land development

     —           —           —           2,940   

Second mortgages

     —           3,617         —           3,898   

Multifamily

     —           271         —           266   

Agriculture

     —           —           —           172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     386         65,932         484         73,275   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 386       $ 65,932       $ 484       $ 73,275   
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in the accretable yield balance for the six months ended June 30, 2014 and the year ended December 31, 2013 is as follows (dollars in thousands):

 

Balance, January 1, 2013

   $ 54,144   

Accretion

     (11,936

Reclassification from nonaccretable yield

     9,307   
  

 

 

 

Balance, December 31, 2013

     51,515   

Accretion

     (6,225

Reclassification from nonaccretable yield

     10,203   

Transfer of PCI loans to non-covered loans

     (4,773
  

 

 

 

Balance, June 30, 2014

   $ 50,720   
  

 

 

 

The covered loans were not classified as nonperforming assets as of June 30, 2014, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all covered loans.

 

5. FDIC AGREEMENTS AND FDIC INDEMNIFICATION ASSET

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of the deposits and certain other liabilities and acquire substantially all assets of SFSB. Under the shared-loss agreements that are part of that agreement, the FDIC will reimburse the Bank for 80% of losses arising from covered loans and foreclosed real estate assets, on the first $118 million in losses on such covered loans and foreclosed real estate assets, and for 95% of losses on covered loans and foreclosed real estate assets thereafter. Under the shared-loss agreements, a “loss” on a covered loan or foreclosed real estate is defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or restructuring of the covered loan or foreclosed real estate. The reimbursements for losses on single family, 1-4 family residential mortgage assets are to be made quarterly through March 2019, and the reimbursements for losses on other covered assets were made quarterly through March 2014. The shared-loss agreements provide for indemnification from the first dollar of losses without any threshold requirement. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction, January 30, 2009. New loans made after that date are not covered by the shared-loss agreements. The fair value of the shared-loss agreements is detailed below.

The Company is accounting for the shared-loss agreements as an indemnification asset pursuant to the guidance in FASB ASC 805, Business Combinations. The FDIC indemnification asset is required to be measured in the same manner as the asset or liability to which it relates. The FDIC indemnification asset is measured separately from the covered loans and other real estate owned assets (OREO) because it is not contractually embedded in the covered loan and OREO and is not transferable should the Company choose to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and other real estate owned and the loss sharing percentages outlined in the shared-loss agreements with the FDIC. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Because the acquired loans are subject to shared-loss agreements and a corresponding indemnification asset exists to represent the value of expected payments from the FDIC, increases and decreases in loan accretable yield due to changing loss expectations will also have an impact to the valuation of the FDIC indemnification asset. Improvement in loss expectations will typically increase loan accretable yield and decrease the value of the FDIC indemnification asset and, in some instances, result in an amortizable premium on the FDIC indemnification asset. Increases in loss expectations will typically be recognized as impairment in the current period through allowance for loan losses, resulting in additional noninterest income for the amount of the increase in the FDIC indemnification asset.

In addition to the premium amortization, the balance of the FDIC indemnification asset is affected by expected payments from the FDIC. Under the terms of the shared-loss agreements, the FDIC will reimburse the Company for loss events incurred related to the covered loan portfolio. These events include such things as future writedowns due to decreases in the fair market value of OREO, net loan charge-offs and recoveries, and net gains and losses on OREO sales.

As discussed above, the shared-loss agreement for assets other than single family, 1-4 residential mortgage assets expired March 2014. The FDIC indemnification asset related to those assets was zero March 31, 2014.

The following table presents the balances of the FDIC indemnification asset at June 30, 2014 and December 31, 2013 (dollars in thousands):

 

    Anticipated
Expected
Losses
    Estimated
Loss
Sharing
Value
    Amortizable
Premium
(Discount)
at Present
Value
    FDIC
Indemnification
Asset

Total
 

January 1, 2013

  $ 23,205      $ 18,564      $ 15273      $ 33,837   

Increases:

       

Writedown of OREO property to FMV

    344        275          275   

Decreases:

       

Net amortization of premium

        (6,449     6,449

Reclassifications to FDIC receivable:

       

Net loan charge-offs and recoveries

    (1,268     (1,014       (1,014

OREO sales

    (1,180     (944       (944

Reimbursements requested from FDIC

    (370     (296       (296

Reforecasted Change in Anticipated Expected Losses

    (7,217     (5,774     5,774        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

  $ 13,514      $ 10,811      $ 14,598      $ 25,409   

Increases:

       

Writedown of OREO property to FMV

    34        27          27   

Decreases:

       

Net amortization of premium

        (2,976     (2,976

Reclassifications to FDIC receivable:

       

Net loan charge-offs and recoveries

    (46     (37       (37

OREO sales

    (140     (112       (112

Reimbursements requested from FDIC

    (115     (92       (92

Reforecasted Change in Anticipated Expected Losses

    (6,185     (4,949     4,949        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

  $ 7,062      $ 5,648      $ 16,571      $ 22,219   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

6. DEPOSITS

The following table provides interest bearing deposit information, by type, as of June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

NOW

   $ 114,530       $ 102,111   

MMDA

     92,602         94,170   

Savings

     77,381         75,159   

Time deposits less than $100,000

     243,509         235,482   

Time deposits $100,000 and over

     308,050         315,287   
  

 

 

    

 

 

 

Total interest bearing deposits

   $ 836,072       $ 822,209   
  

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

7. LONG-TERM DEBT

On April 23, 2014, the Company repurchased the then outstanding 10,680 shares of Series A Preferred Stock (see Note 10). The Company funded the repurchase through an unsecured third-party term loan. The term loan, which has a maturity date of April 21, 2017, requires that the Company make quarterly payments of 7.5% of the initial outstanding principal, plus accrued interest, during a six-quarter period beginning with the quarter ending December 31, 2014, quarterly payments of 10% of the initial outstanding principal, plus accrued interest, during the subsequent four-quarter period and the remaining principal amount and accrued interest at maturity. The interest rate resets quarterly based on three-month LIBOR plus 3.50% per annum. As of June 30, 2014 the interest rate was 3.73%.

 

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present activity net of tax in accumulated other comprehensive loss (AOCL) for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

                                            
     Three months ended June 30, 2014  
     Unrealized Gain
(Loss) on
Securities
    Defined
Benefit
Pension Plan
    Total Other
Comprehensive
Loss
 

Beginning balance

   $ (1,716   $    (155   $ (1,871

Other comprehensive income before reclassifications

     1,287        —          1,287   

Amounts reclassified from AOCL

     (16     —          (16
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     1,271        —          1,271   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (445   $ (155   $ (600
  

 

 

   

 

 

   

 

 

 

 

                                            
     Three months ended June 30, 2013  
     Unrealized Gain
(Loss) on
Securities
    Defined
Benefit
Pension Plan
    Total Other
Comprehensive
Loss
 

Beginning balance

   $ 3,715      $ (1,038   $ 2,677   

Other comprehensive loss before reclassifications

     (4,885     —          (4,885

Amounts reclassified from AOCL

     (86     —          (86
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

     (4,971     —          (4,971
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (1,256   $ (1,038   $ (2,294
  

 

 

   

 

 

   

 

 

 

 

                                            
     Six months ended June 30, 2014  
     Unrealized Gain
(Loss) on
Securities
    Defined
Benefit
Pension Plan
    Total Other
Comprehensive
Loss
 

Beginning balance

   $ (3,954   $ (155   $ (4,109

Other comprehensive income before reclassifications

     3,759        —          3,759   

Amounts reclassified from AOCL

     (250     —          (250
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     3,509        —          3,509   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (445   $    (155   $ (600
  

 

 

   

 

 

   

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     Six months ended June 30, 2013  
     Unrealized Gain
(Loss) on
Securities
    Defined
Benefit
Pension Plan
    Total Other
Comprehensive
Loss
 

Beginning balance

   $ 3,866      $ (1,038   $ 2,828   

Other comprehensive loss before reclassifications

     (4,853     —          (4,853

Amounts reclassified from AOCL

     (269     —          (269
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

     (5,122     —          (5,122
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (1,256   $ (1,038   $ (2,294
  

 

 

   

 

 

   

 

 

 

The following tables present the effects of reclassifications out of accumulated other comprehensive loss on line items of consolidated income for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

Details about Accumulated Other
Comprehensive Loss Components

  Amount Reclassified from Accumulated Other
Comprehensive Loss
   

Affected Line Item in the Unaudited
Consolidated Statement of Income

    Three months ended      
    June 30, 2014     June 30, 2013      

Unrealized (gains) losses on securities available for sale

  $ (24   $ (130  

Gain on securities transactions, net

    8        44     

Income tax expense

 

 

 

   

 

 

   
  $ (16   $ (86  

Net of tax

 

 

 

   

 

 

   

 

Details about Accumulated Other
Comprehensive Loss Components

  Amount Reclassified from Accumulated Other
Comprehensive Loss
   

Affected Line Item in the Unaudited
Consolidated Statement of Income

    Six months ended      
    June 30, 2014     June 30, 2013      

Unrealized (gains) losses on securities available for sale

  $ (379   $ (408  

Gain on securities transactions, net

    129        139     

Income tax expense

 

 

 

   

 

 

   
  $ (250   $ (269  

Net of tax

 

 

 

   

 

 

   

 

9. FAIR VALUES OF ASSETS AND LIABILITIES

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

    Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

 

    Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

    Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of June 30, 2014.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and loans held for sale are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

 

     June 30, 2014  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 85,910       $ 81,228       $ 4,682       $ —     

U.S. Gov’t sponsored agencies

     —           —           —           —     

State, county and municipal

     137,285         —           137,285         —     

Corporate and other bonds

     12,092         2,731         9,361         —     

Mortgage backed – U.S. Gov’t agencies

     2,519         —           2,519         —     

Mortgage backed – U.S. Gov’t sponsored agencies

     28,966         6,130         22,836         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     266,772         90,089         176,683         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 266,772       $ 90,089       $ 176,683       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

U.S. Treasury issue and other U.S. Gov’t agencies

   $ 98,987       $ 94,935       $ 4,052       $ —     

U.S. Gov’t sponsored agencies

     486         —           486         —     

State, county and municipal

     134,096         2,482         131,614         —     

Corporate and other bonds

     6,349         —           6,349         —     

Mortgage backed – U.S. Gov’t agencies

     3,439         —           3,439         —     

Mortgage backed – U.S. Gov’t sponsored agencies

     22,420         2,531         19,889         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     265,777         99,948         165,829         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for sale

     100         —           100         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 265,877       $ 99,948       $ 165,929       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing company for security market data. The third party vendor has controls and edits in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 16 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Loans held for sale

The carrying amounts of loans held for sale approximate fair value.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following table presents assets measured at fair value on a nonrecurring basis for the period ended June 30, 2014 and December 31, 2013 (dollars in thousands):

 

     June 30, 2014  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 7,929       $ —         $    778       $ 7,151   

Other real estate owned (OREO), non-covered

     6,390         —           —           6,390   

Other real estate owned (OREO), covered

     2,967         —           —           2,967   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 17,286       $ —         $ 778       $ 16,508   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 10,334       $ —         $ 1,791       $ 8,543   

Other real estate owned (OREO), non-covered

     6,244         —           —           6,244   

Other real estate owned (OREO), covered

     2,692         —           —           2,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 19,270       $ —         $ 1,791       $ 17,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans, non-covered

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At June 30, 2014 and December 31, 2013, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 12 months old. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan within Level 2.

The Company may also identify collateral deterioration based on current market sales data, including price and absorption, as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site inspections by Company personnel. Internally prepared estimates generally result from current market data and actual sales data related to the Company’s collateral or where the collateral is located. When management determines that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. In instances where an appraisal received subsequent to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest rate is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Other real estate owned, covered and non-covered

Other real estate owned (OREO) assets are adjusted to fair value less estimated selling costs upon transfer of the related loans to OREO property. Subsequent to the transfer, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset within Level 2. When an appraised value is not available or management determines that the fair value of the collateral is further impaired below the appraised value due to such things as absorption rates and market conditions, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair value measures by level of valuation assumptions used for those assets. This table excludes financial instruments for which the carrying value approximates fair value (dollars in thousands):

 

     June 30, 2014  
     Carrying Value      Estimated Fair
Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Securities held to maturity

   $ 26,183       $ 27,782       $ —         $ 27,782       $ —     

Loans, non-covered

     622,089         627,068         —           614,520         12,548   

Loans, covered

     65,546         73,865         —           —           73,865   

FDIC indemnification asset

     22,219         5,441         —           —           5,441   

Financial liabilities:

              

Interest bearing deposits

     836,072         839,076         —           839,076         —     

Long-term borrowings

     91,570         91,537         —           91,537         —     

 

     December 31, 2013  
     Carrying Value      Estimated Fair
Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Securities held to maturity

   $ 28,563       $ 30,305       $ —         $ 30,305       $ —     

Loans, non-covered

     585,729         591,081         —           582,538         8,543   

Loans, covered

     72,791         88,693         —           —           88,693   

FDIC indemnification asset

     25,409         10,557         —           —           10,557   

Financial liabilities:

              

Interest bearing deposits

     822,209         824,895         —           824,895         —     

Long-term borrowings

     81,249         81,014         —           81,014         —     

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of June 30, 2014. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Financial Assets

Cash and cash equivalents

The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair value.

Securities held for investment

For securities held for investment, fair values are based on quoted market prices or dealer quotes.

Restricted securities

The carrying value of restricted securities approximates their fair value based on the redemption provisions of the respective issuer.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value.

Loans not covered by FDIC shared-loss agreement (non-covered loans)

The fair value of loans, excluding PCI loans, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above. The fair value of non-covered loans that are PCI loans is estimated using the same methodology described below for covered loans.

Loans covered by FDIC shared-loss agreement (covered loans) and PCI loans

Fair values for covered loans and PCI loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were pooled together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on market rates for new originations of comparable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.

FDIC indemnification asset

Loss sharing assets are measured separately from the related covered assets as they are not contractually embedded in the covered assets and are not transferable with the assets should the Company choose to dispose of them. Fair value is estimated using projected cash flows related to the obligations under the shared-loss agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. A reduction in loss expectations has resulted in the estimated fair value of the FDIC indemnification asset being lower than its carrying value. This creates a premium that is amortized over the life of the asset and is reflected in Note 5.

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Financial Liabilities

Noninterest bearing deposits

The carrying amount of noninterest bearing deposits approximates fair value.

Interest bearing deposits

The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and securities sold under agreements to repurchase

The carrying amount of federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Long-term borrowings

The fair values of the Company’s long-term borrowings, such as FHLB advances and long-term debt, are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest payable

The carrying amounts of accrued interest payable approximate fair value.

Off-balance sheet financial instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

10. EARNINGS PER COMMON SHARE

Basic earnings per common share (EPS) is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive common shares outstanding attributable to stock instruments (dollars and shares in thousands, except per share data):

 

     Net
Income
Available to
Common
Shareholders

(Numerator)
     Weighted
Average Common
Shares
(Denominator)
     Per Common Share
Amount
 

For the three months ended June 30, 2014

        

Basic EPS

   $ 1,538         21,742       $ 0.07   

Effect of dilutive stock awards

     —           197         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1,538         21,939       $ 0.07   
  

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2013

        

Shares issued

        21,685      

Unissued vested restricted stock

        11      
     

 

 

    

Basic EPS

   $ 1,327         21,696       $ 0.06   

Effect of dilutive stock awards

     —           139         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1,327         21,835       $ 0.06   
  

 

 

    

 

 

    

 

 

 

 

     Net
Income
Available to
Common
Shareholders

(Numerator)
     Weighted
Average Common
Shares
(Denominator)
     Per Common Share
Amount
 

For the six months ended June 30, 2014

        

Basic EPS

   $ 3,197         21,736       $ 0.15   

Effect of dilutive stock awards

     —           236         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 3,197         21,972       $ 0.15   
  

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2013

        

Shares issued

        21,678      

Unissued vested restricted stock

        11      
     

 

 

    

Basic EPS

   $ 2,372         21,689       $ 0.11   

Effect of dilutive stock awards

     —           169         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 2,372         21,858       $ 0.11   
  

 

 

    

 

 

    

 

 

 

Excluded from the computation of diluted earnings per common share were 36,000 common shares issuable under awards or options during the three and six months ended June 30, 2014, because their inclusion would be anti-dilutive. Anti-dilutive common shares issuable under awards, options or warrants of 846,000 were excluded for the three and six months ended June 30, 2013.

In December 2008, the Company issued 17,680 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A to the United States Department of Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program. Under the terms of the Series A Preferred Stock, prior to its redemption, as discussed below, the Company was required to pay cumulative dividends on a quarterly basis at a rate of 5% per year on such amount through the February 2014 payment. After the February 2014 payment, the dividend rate automatically increased to 9% per year. The Company could defer dividend payments, but the dividend was a cumulative dividend that accrued for payment in the future. Deferred dividends also accrued interest at the same rate as the dividend. The failure to pay dividends for six dividend periods triggered the right for the holder of the Series A Preferred Stock to appoint two directors to the Company’s board.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

During 2013, the Company repurchased 7,000 shares of the original 17,680 shares of Series A Preferred Stock. The Company funded the repurchase through the earnings of its banking subsidiary.

On April 23, 2014, the Company repurchased the remaining 10,680 shares of Series A Preferred Stock. The Company funded the repurchase through a term loan with SunTrust Bank (See Note 7). The form of the repurchase was a redemption under the terms of the TARP preferred stock. The Company paid the Treasury $10.9 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares.

On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the Series A Preferred Stock. The Company had originally issued the warrant, which permitted Treasury to purchase 780,000 shares of the Company’s common stock at an exercise price of $3.40, in December 2008. There are no other investments from the Company’s participation in TARP that remain outstanding.

 

11. DEFINED BENEFIT PLAN

On May 31, 2008, the Company adopted the Bank of Essex noncontributory defined benefit pension plan for all full-time pre-merger Bank employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. The Company has frozen the plan benefits for all participants effective December 31, 2010. The following table presents the components of net periodic benefit cost for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

     Three months ended     Six months ended  
(dollars in thousands)    June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Interest cost

   $ 56      $ 56      $ 111      $ 112   

Expected return on plan assets

     (99     (101     (198     (202

Amortization of prior service cost

     1               2          

Recognized net actuarial loss

     3        17        6        35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ (39   $ (28   $ (79   $ (55
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2014, there had been no employer contributions for the plan year. The Company is considering terminating the pension plan in the future. No determination has been made and the Company has not determined the financial impact of the termination of the plan.

 

12. BRANCH SALES

The Company is currently marketing for sale its office in Crofton, Maryland, which had been the former SFSB headquarters, and its office in Catonsville, Maryland. In accordance with FASB ASC 360, Property, Plant and Equipment, the net book value of the offices, excluding furniture and equipment, of $2.8 million and $464,000, respectively, were classified as held for sale at June 30, 2014, as it represents the lower of cost or fair market value. In connection with the potential sale, the Company intends to lease approximately 66% of the Crofton office, including the current branch location. Any resulting gain will be deferred over the life of the lease in accordance with FASB ASC 840-40, Leases, Sale-Leaseback Transactions.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition at June 30, 2014 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and six months ended June 30, 2014 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 21 full-service offices, 14 of which are in Virginia and seven of which are in Maryland. The Bank also operates two loan production offices in Virginia. The Company relocated its corporate headquarters on March 31, 2014. The Bank opened a new branch office in Annapolis, Maryland on March 25, 2014 and a branch office at its new headquarters in Richmond, Virginia on April 7, 2014.

The Bank was established in 1926. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. Additionally, the Bank earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products. Other sources of noninterest income can include gains or losses on securities transactions, gains from loan sales, transactions involving bank-owned property, and income from Bank Owned Life Insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and benefits, occupancy and equipment costs, professional fees, the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

The Company makes certain forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, future strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

 

    the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

 

    assumptions that underlie the Company’s allowance for loan losses;

 

    general economic and market conditions, either nationally or in the Company’s market areas;

 

    the interest rate environment;

 

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    competitive pressures among banks and financial institutions or from companies outside the banking industry;

 

    real estate values;

 

    the demand for deposit, loan, and investment products and other financial services;

 

    the demand, development and acceptance of new products and services;

 

    the performance of vendors or other parties with which the Company does business;

 

    time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

 

    the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

 

    assumptions and estimates that underlie the accounting for loan pools under the shared-loss agreements;

 

    consumer profiles and spending and savings habits;

 

    levels of fraud in the banking industry;

 

    the level of attempted cyber attacks in the banking industry;

 

    the securities and credit markets;

 

    costs associated with the integration of banking and other internal operations;

 

    the soundness of other financial institutions with which the Company does business;

 

    inflation;

 

    technology; and

 

    legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

 

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The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses on Non-covered Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This quarterly evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific and general components. For loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, management believes that it is more likely than not that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, availability of current financial information, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

FASB ASC 310, Receivables, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310, which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through allowance for loan losses.

 

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The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “covered loans”), subject to FASB ASC Topic 805, Business Combinations (formerly SFAS 141(R)), are recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

The shared-loss agreement with the Federal Deposit Insurance Corporation (FDIC) related to the acquisition of SFSB for loans other than those secured by single family, residential 1-4 family mortgages expired March 31, 2014. These loans will continue to be accounted for in accordance with FASB ASC 310-30 as purchased credit impaired loans and were classified as non-covered loans effective April 1, 2014 (the “PCI loans”).

The covered loans and PCI loans are subject to the credit review standards described above for non-covered loans. If and when credit deterioration occurs subsequent to the date that the covered loans were acquired, a provision for credit loss for covered loans will be charged to earnings for the full amount without regard to the shared-loss agreements.

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

FDIC Indemnification Asset

The Company is accounting for the shared-loss agreements as an indemnification asset pursuant to the guidance in FASB ASC 805. The FDIC indemnification asset is required to be measured in the same manner as the asset or liability to which it relates. The FDIC indemnification asset is measured separately from the covered loans and other real estate owned (OREO) assets because it is not contractually embedded in the covered loan and OREO assets and is not transferable should the Company choose to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and OREO and the loss sharing percentages outlined in the shared-loss agreements. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

Because the acquired loans are subject to shared-loss agreements and a corresponding indemnification asset exists to represent the value of expected payments from the FDIC, increases and decreases in loan accretable yield due to changing loss expectations will also have an impact to the valuation of the FDIC indemnification asset. Improvement in loss expectations will typically increase loan accretable yield and decrease the value of the FDIC indemnification asset and, in some instances, result in an amortizable premium on the FDIC indemnification asset. Increases in loss expectations will typically be recognized as impairment in the current period through allowance for loan losses while resulting in additional noninterest income for the amount of the increase in the FDIC indemnification asset.

 

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Other Intangible Assets

The Company is accounting for other intangible assets in accordance with FASB ASC 350, Intangibles—Goodwill and Others. Under FASB ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC 350.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income. Under FASB ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable.

The Company and its subsidiaries are subject to U. S. federal income tax as well as various state income taxes. All years from 2010 through 2013 are open to examination by the respective tax authorities.

Other Real Estate Owned

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.

RESULTS OF OPERATIONS

Overview

Net income was $1.7 million for the second quarter of 2014, compared with $1.6 million in the second quarter of 2013. Net income available to common shareholders was $1.5 million in the second quarter of 2014 compared with $1.3 million in the second quarter of 2013. Earnings per common share, basic and fully diluted, were $0.07 per share for the second quarter of 2014 compared with $0.06 per share for the second quarter of 2013.

 

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The Company reported a year-over-year reduction in noninterest expenses of $399,000, or 4.1%, for the second quarter. The most notable decline was in OREO expense, which equaled $100,000 for the second quarter of 2014, declining $402,000, or 80.1%, from the same quarter in 2013. The reduction in noninterest expenses more than offset a $368,000, or 27.5%, decline in noninterest income. Virtually all components of noninterest income were lower in the second quarter of 2014 versus the second quarter of 2013. The largest of which were a decrease of $140,000 in service charge income, of which $121,000 was due to the sale of Georgia deposits in November 2013, and a decrease of $106,000 in securities gains.

Net income was $3.4 million for the six months ended June 30, 2014 compared with $2.9 million for the first half of 2013. The $513,000 or 17.5% improvement year over year was primarily driven by a $933,000 reduction in noninterest expenses, $856,000 of which came from lower OREO expenses. Net income available to common shareholders was $3.2 million in the first half of 2014 compared with $2.4 million in the first half of 2013, an increase of 34.8%. Earnings per common share, basic and fully diluted, were $0.15 per share and $0.11 per share for the respective time frames.

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

Year-over-year, net interest income increased a modest $58,000, or 0.54%, from $10.7 million in the second quarter of 2013 to $10.8 million in the second quarter of 2014. This was primarily the result of an increase in the Company’s net interest spread, from 4.25% in the second quarter of 2013 to 4.29% in the second quarter of 2014. The most significant factor influencing the positive change in the interest spread year-over-year was a 5 basis point decline in the cost of interest bearing liabilities driven by a 5 basis point decline in interest bearing deposits. During the second quarter of 2014, the Company incurred $10.7 million in long-term debt to retire its outstanding TARP preferred stock at an interest rate of 3-month LIBOR plus 350 basis points. Management anticipates significant after tax savings as the loan interest rate of 3.73% for the second quarter is tax deductible, while the dividend rate on the TARP preferred stock was 9.0%, and was not deductible for tax purposes. The effect on the margin of the added long-term debt was offset by the lower cost for FHLB borrowings of $76.8 million of 61 basis points. Additionally, the Company received a pay-off on a commercial acquisition and development (A&D) loan in the FDIC covered loan portfolio during the second quarter of 2014. The pool of A&D loans was written down to a zero carrying value in 2011, and thus any disposition or settlement results in dollar-for-dollar interest income recognition. In this instance, the Bank recognized $706,000 in interest income. The Company’s net interest margin improved 3 basis points from 4.32% in the second quarter of 2013 to 4.35% for the same period in 2014.

For the six months ended June 30, 2014, net interest income of $21.1 million increased $95,000, or 0.5%, from net interest income of $21.0 million for the first six months of 2013. The Company’s net interest spread improved from 4.18% for the first six months of 2013 to 4.26% for the same period in 2014. While the cost of interest bearing liabilities declined from 0.81% to 0.72% during the comparison period, the yield on earning assets declined by 1 basis point to 4.98% for the six month period in 2014. The result was a net interest margin of 4.32% for the first six months of 2014 compared with 4.25% for the first six months in 2013.

The following tables set forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three and six months ended June 30, 2014 and 2013. The tables also set forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table, as loans carrying a zero yield.

 

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(dollars in thousands)

   Three months ended June 30, 2014     Three months ended June 30, 2013  
     Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
 

ASSETS:

              

Loans, non-covered, including fees

   $ 611,065      $ 7,291         4.79   $ 582,940      $ 7,622         5.24

FDIC covered loans, including fees

     66,722        3,264         19.62        82,177        2,745         13.40   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     677,787        10,555         6.25        665,117        10,367         6.25   

Interest bearing bank balances

     28,795        22         0.31        20,407        14         0.27   

Federal funds sold

     1,379        —           0.10        1,951        1         0.11   

Securities (taxable)

     269,566        1,710         2.54        293,211        1,945         2.65   

Securities (tax exempt)(1)

     22,436        255         4.53        20,235        248         4.91   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total earning assets

     999,963        12,542         5.03        1,000,921        12,575         5.04   

Allowance for loan losses

     (10,802          (12,919     

Non-earning assets

     117,948             129,804        
  

 

 

        

 

 

      

Total assets

     1,107,109           $ 1,117,806        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Demand—interest bearing

   $ 199,829      $ 148         0.30   $ 242,346      $ 190         0.31

Savings

     77,057        66         0.34        81,627        70         0.34   

Time deposits

     558,797        1,239         0.89        536,115        1,340         1.00   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total deposits

     835,683        1,453         0.70        860,088        1,600         0.75   

Short-term borrowings

     73        1         0.61        1,145        2         0.77   

FHLB and other borrowings

     81,056        162         0.80        53,765        189         1.41   

Long-term debt

     8,098        81         3.98        —          —           —     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

     924,910        1,697         0.74        914,998        1,791         0.79   

Noninterest bearing deposits

     73,738             81,056        

Other liabilities

     4,526             3,936        
  

 

 

        

 

 

      

Total liabilities

     1,003,174             999,990        

Shareholders’ equity

     103,935             117,816        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 1,107,109           $ 1,117,806        
  

 

 

        

 

 

      

Net interest earnings

     $ 10,845           $ 10,784      
    

 

 

        

 

 

    

Net interest spread

          4.29          4.25
       

 

 

        

 

 

 

Net interest margin

          4.35          4.32
       

 

 

        

 

 

 

 

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

 

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(dollars in thousands)

   Six months ended June 30, 2014     Six months ended June 30, 2013  
     Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/
Paid
 

ASSETS:

              

Loans, non-covered, including fees

   $ 603,381      $ 14,342         4.79   $ 581,821      $ 15,133         5.25

FDIC covered loans, including fees

     69,731        6,225         18.00        81,951        5,404         13.30   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     673,112        20,567         6.16        663,772        20,537         6.24   

Interest bearing bank balances

     22,586        35         0.31        18,416        22         0.24   

Federal funds sold

     693        —           0.10        5,859        3         0.10   

Securities (taxable)

     274,404        3,408         2.48        296,587        3,783         2.55   

Securities (tax exempt)(1)

     21,244        491         4.61        19,075        473         4.96   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total earning assets

     992,039        24,501         4.98        1,003,709        24,818         4.99   

Allowance for loan losses

     (10,878          (13,193     

Non-earning assets

     115,838             131,084        
  

 

 

        

 

 

      

Total assets

   $ 1,096,999           $ 1,121,600        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Demand—interest bearing

   $ 195,341      $ 291         0.30   $ 244,021      $ 380         0.31

Savings

     76,333        132         0.35        80,011        131         0.33   

Time deposits

     557,340        2,438         0.88        543,578        2,790         1.03   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total deposits

     829,014        2,861         0.70        867,610        3,301         0.77   

Short-term borrowings

     601        2         0.52        739        3         0.76   

FHLB and other borrowings

     81,145        323         0.80        53,851        381         1.43   

Long-term debt

     4,071        81         3.98          
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

     914,831        3,267         0.72        922,200        3,685         0.81   

Noninterest bearing deposits

     71,180             78,319        

Other liabilities

     4,225             4,026        
  

 

 

        

 

 

      

Total liabilities

     990,236             1,004,545        

Shareholders’ equity

     106,763             117,055        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 1,096,999           $ 1,121,600        
  

 

 

        

 

 

      

Net interest earnings

     $ 21,234           $ 21,133      
    

 

 

        

 

 

    

Net interest spread

          4.26          4.18
       

 

 

        

 

 

 

Net interest margin

          4.32          4.25
       

 

 

        

 

 

 

 

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. See Allowance for Loan Losses on Non-covered Loans in the Critical Accounting Policies section above for further discussion.

Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

Management also actively monitors its covered and PCI loan portfolios for impairment and necessary loan loss provisions. Provisions for these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

 

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The Company did not record a provision for loan losses in either the three month and six month periods ended June 30, 2014 or 2013 with respect to either its non-covered loan portfolio or its FDIC covered loan portfolio. For the non-covered loan portfolio, this was the direct result of continued improvement in loan quality. The Company’s level of classified and “impaired” loans continues to remain low.

There were net charge-offs of $254,000 in the second quarter of 2014 compared with net charge-offs of $735,000 in the second quarter of 2013. Total charge-offs for the second quarter of 2014 were $446,000 compared with $1.3 million in the second quarter of 2013. Recoveries of previously charged-off loans were $192,000 for the second quarter of 2014 compared with $567,000 in the second quarter of 2013.

There were net charge-offs of $288,000 in the six months ended June 30, 2014 compared with $1.4 million in the six months ended June 30, 2013. Total charge-offs for the first six months of 2014 were $598,000 compared with $2.2 million for the same period in 2013. Recoveries were $310,000 in the six months ended June 30, 2014 compared with $813,000 in the six months ended June 30, 2013.

Noninterest Income

Noninterest income declined $368,000, or 27.5%, from the second quarter of 2013 to the second quarter of 2014. Service charge income declined $140,000, or 20.0%, over the same time frame to equal $561,000 for the second quarter. This decline was driven by a $121,000 reduction of service charge income from the Georgia branches, which were sold during the fourth quarter of 2013. Securities gains in the second quarter of 2013 were $130,000 versus $24,000 for the second quarter of 2014. Other operating income declined $143,000, or 46.4%, when comparing the quarter ended June 30, 2013 to the quarter ended June 30, 2014. Lower mortgage fee income coupled with a $39,000 gain on the sale of a covered OREO property were the key components of this decline.

For the six months ended June 30, 2014, noninterest income totaled $2.3 million, which was a $393,000, or 14.8%, decline from the first six months of 2013. The decline year over year was principally due to a $314,000 reduction in service charge income related to the sale of the Georgia branches.

Noninterest Expense

Noninterest expenses declined $399,000, or 4.1%, when comparing the second quarter of 2013 to the same period in 2014. The single largest decline was evidenced in OREO expenses. These expenses declined from $502,000 in the second quarter of 2013 to $100,000 in the second quarter of 2014. The Company benefitted from a $114,000, or 7.2%, decline in the indemnification asset amortization from the second quarter of 2013 to the second quarter of 2014. The two most significant increases in noninterest expenses evidenced from the second quarter of 2013 to the second quarter of 2014 were in other operating expenses and salaries and wages, which partially mitigated the improvement noted above. Salaries and wages increased $127,000, or 3.3%, from the second quarter of 2013 to the second quarter of 2014. This is the result of increased staffing for a wholesale mortgage unit consisting of six employees who joined the Company on April 1, 2014. Additionally, there were normal salary raises year over year. Other operating expenses increased $226,000, or 17.6%, over the same time frame. Bank franchise tax, credit expenses and external audit expenses increased $71,000, $79,000, and $54,000, respectively. These expenses collectively resulted in the majority of the increase in other operating expenses.

Noninterest expenses declined $933,000, or 4.8%, when comparing the first six months 2013 and 2014. The majority of the decline was evidenced in four categories: OREO expenses, data processing fees, amortization of intangibles, and FDIC indemnification asset amortization. OREO expenses declined $856,000, or 69.1%, during the first six months of 2014 versus the same time frame in 2013, as smaller write-downs were recognized in the first half of 2014. Data processing fees were $131,000 lower in the first half of 2014 compared with the first six months of 2013, and intangible amortization was $177,000, or 15.6%, lower over the same time frame. These expense reductions were due to the sale of the Georgia branches. Lastly, the Company benefitted from $117,000, or 3.8%, in decline in indemnification asset amortization for the first half of 2014 versus the first half of 2013.

 

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Income Taxes

Income tax expense was $649,000 for the three months ended June 30, 2014, compared with income tax expense of $673,000 for second quarter of 2013, respectively. Income tax expense was $1.4 million versus $1.2 million for the first six months of 2014 and 2013, respectively.

FINANCIAL CONDITION

General

During the first six months of 2014, total assets increased $25.3 million to $1.114 billion at June 30, 2014. Total loans were $698.3 million at June 30, 2014, increasing $28.8 million since December 31, 2013. Total non-covered loans were $632.3 million at June 30, 2014 and $596.1 million at December 31, 2013. The June 30, 2014 totals include $5.2 million of loans formerly categorized under the FDIC shared-loss agreement now categorized as non-covered loans (the PCI loans). While these loans no longer have FDIC loss guaranties, they are subject to SOP 03-3 accounting rules; thus, they will not receive consideration under the loan loss reserve under the normal non-covered portfolio. Excluding the $5.2 million mentioned above, non-covered loans would have increased $31.0 million, or 5.2%, since December 31, 2013.

The Company’s securities portfolio, excluding equity securities, declined $1.4 million, or 0.5%, from $294.3 million at December 31, 2013, to $293.0 million at June 30, 2014. Realized gains of $379,000 occurred during the first six months of 2014 through sales and call activity. During the first quarter of 2014, the SBA floating rate portion of the investment portfolio evidenced some unforeseen pre-payment activity, which resulted in the acceleration of unamortized premiums paid on these securities. Subsequently, management sold additional SBA floating rate securities to mitigate the pre-payment anomaly and sold some longer-term municipal securities. This was a strategic decision to mitigate duration risk in the municipal portfolio. During the second quarter, management opted to diversify some of the portfolio, purchasing AAA-rated household name corporate bonds.

The Company had cash and cash equivalents of $24.9 million and $23.8 million at June 30, 2014 and December 31, 2013, respectively. There were $2.5 million of federal funds purchased at June 30, 2014 and none at December 31, 2013, while there were no securities sold under agreement to repurchase (repos) at June 30, 2014 versus $6.0 million in repos at December 31, 2013.

The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under FASB ASC 320, Investments – Debt and Equity Securities. The market value of the AFS portfolio was $266.8 million at June 30, 2014 and $265.8 million at December 31, 2013. At June 30, 2014, the Company had a net unrealized loss on the AFS portfolio of $674,000 compared with a net unrealized loss of $6.0 million at December 31, 2013. This increase is attributed to a $5.4 million increase in the municipal category. These securities exhibit more price volatility in a changing interest rate environment, in the Company’s portfolio, because of their longer weighted average life, than is consistent with other categories contained within the rest of the portfolio. Municipal securities comprise 51% of the total investment portfolio at June 30, 2014.

Interest bearing deposits at June 30, 2014 were $836.1 million, an increase of $13.9 million from December 31, 2013. NOW and Savings account balances increased $12.4 million and $2.2 million, or 12.2% and 3.0%, respectively, since December 31, 2013. While time deposit account balances increased only $790,000 during the first half of 2014, the Company allowed $29.8 million in brokered time deposits to mature. This brokered funding was used, in part, to fund the sale of the Georgia branches, and the corresponding retail generation was precipitated by two promotions that management ran during the first half of 2014. This was a strategic initiative to retain core retail funding while not hampering earnings.

FHLB advances were $76.8 million at June 30, 2014, compared with $77.1 million at December 31, 2013. The Company increased the level of FHLB advances due to the low cost nature of this funding source and to assist with funding the sale of the Georgia franchise in the fourth quarter of 2013. Long term debt totaled $10.7 million at June 30, 2014. This borrowing was entered into during April 2014, and the proceeds were used to redeem the Company’s remaining outstanding TARP preferred stock.

 

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Shareholders’ equity was $102.1 million at June 30, 2014 and $106.7 million at December 31, 2013. While $11.5 million in equity was redeemed with respect to the TARP preferred stock and the associated warrant, shareholders’ equity declined only $4.6 million or 4.3%. The partial offset was earnings retention as well as a $3.5 million improvement in other comprehensive income related to the unrealized gains and losses in the investment portfolio.

Asset Quality – non-covered assets, excluding PCI loans

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

Non-covered loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. See Allowance for Loan Losses on Non-covered Loans in the Critical Accounting Policies section above for further discussion.

The Company maintains a list of non-covered loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Non-covered nonperforming assets totaled $17.6 million at June 30, 2014 and net charge-offs were $288,000 for the six months ended June 30, 2014. This compares with nonperforming assets of $18.3 million and net charge-offs of $2.5 million at and for the year ended December 31, 2013.

Nonperforming non-covered loans were $11.2 million at June 30, 2014, declining from $12.1 million at December 31, 2013. The $922,000 reduction in nonaccrual loans since December 31, 2013 was the net result of $2.1 million in additions to nonaccrual loans and $3.0 million in reductions. With respect to the reductions to nonaccrual loans, $989,000 were returned to accruing status, $529,000 were charged off, $634,000 were moved to OREO, and $823,000 were the result of payments to existing credits.

The allowance for loan losses equaled 90.8% of non-covered nonaccrual loans at June 30, 2014 compared with 86.3% at December 31, 2013. The ratio of the allowance for loan losses to total nonperforming assets was 57.8% at June 30, 2014, compared with 56.92% at December 31, 2013. The ratio of nonperforming assets to loans and OREO continued to decline. The ratio was 2.77% at June 30, 2014 versus 3.05% at December 31, 2013.

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructured and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At June 30, 2014 and December 31, 2013, total impaired non-covered loans equaled $11.6 million and $13.8 million, respectively.

 

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The following table sets forth selected asset quality data, excluding FDIC covered assets and PCI loans, and ratios for the dates indicated (dollars in thousands):

 

     June 30, 2014     December 31, 2013  

Nonaccrual loans

   $ 11,183      $ 12,105   

Loans past due 90 days and accruing interest

     —          —     
  

 

 

   

 

 

 

Total nonperforming non-covered loans

     11,183        12,105   

OREO – non-covered

     6,390        6,244   
  

 

 

   

 

 

 

Total nonperforming non-covered assets

   $ 17,573      $ 18,349   
  

 

 

   

 

 

 

Accruing troubled debt restructure loans

   $ 7,533      $ 9,922   

Balances

    

Specific reserve on impaired loans

     1,589        1,604   

General reserve related to unimpaired loans

     8,567        8,840   
  

 

 

   

 

 

 

Total allowance for loan losses

     10,156        10,444   

Average loans during quarter, net of unearned income

     606,785        585,461   

Impaired loans

     11,629        13,801   

Non-impaired loans

     615,536        582,372   
  

 

 

   

 

 

 

Total loans, net of unearned income

     627,165        596,173   

Ratios

    

Allowance for loan losses to loans

     1.62     1.75

Allowance for loan losses to nonperforming assets

     57.79        56.92   

Allowance for loan losses to nonaccrual loans

     90.82        86.28   

General reserve to non-impaired loans

     1.39        1.52   

Nonaccrual loans to loans

     1.78        2.03   

Nonperforming assets to loans and OREO

     2.77        3.05   

Net charge-offs for quarter to average loans, annualized

     0.17        0.14   

The Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At June 30, 2014, the Company had 15 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. Three of these loans were restructured using multiple new loans. The aggregated outstanding principal of TDR loans at June 30, 2014 was $8.2 million, of which $706,000 were classified as nonaccrual.

The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan into a “good loan” (the A loan) and a “bad loan” (the B loan). The impact on interest is positive because the Bank is collecting interest on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to the Bank’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or “loss”. An impairment analysis is performed on the B loan and, based on its results, all or a portion of the B note is charged-off or a specific loan loss reserve is established.

The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

 

 

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A further breakout of nonaccrual loans, excluding covered loans, at June 30, 2014 and December 31, 2013 is below (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 4,617       $ 4,229   

Commercial

     874         1,382   

Construction and land development

     5,337         5,882   

Second mortgages

     223         225   

Multifamily

     —          —    

Agriculture

     —           205   
  

 

 

    

 

 

 

Total real estate loans

     11,051         11,923   

Commercial loans

     36         127   

Consumer installment loans

     96         55   

All other loans

     —          —    
  

 

 

    

 

 

 

Total loans

   $ 11,183       $ 12,105   
  

 

 

    

 

 

 

At June 30, 2014 the Company had seven construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed and are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at June 30, 2014 was $5.3 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

There were no charge-offs related to these relationships during the first six months of 2014. The total amount of the allowance for loan losses attributed to all eight relationships was $512,000 at June 30, 2014, or 9.6% of the total credit exposure outstanding. The Company establishes its reserves as described above in Allowance for Loan Losses on Non-covered Loans in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 12 months. The Company orders an automated valuation for balances between $100,000 and $250,000 and uses a ratio analysis for balances less than $100,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

Asset Quality – covered assets and PCI loans

Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The Company makes an estimate of the total cash flows that it expects to collect from a pool of covered loans, which include undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairment in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

 

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Capital Requirements

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

The federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. “Tier 1 capital” is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. “Total capital” is defined as tier 1 capital plus tier 2 capital. Three risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Tier 1 risk-based capital” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital” is total capital divided by risk-weighted assets. The leverage ratio is tier 1 capital divided by total average assets.

The Company’s ratio of total risk-based capital was 14.7% at June 30, 2014 compared with 16.8% at December 31, 2013. The tier 1 risk-based capital ratio was 13.5% at June 30, 2014 and 15.6% at December 31, 2013. The Company’s tier 1 leverage ratio was 9.1% at June 30, 2014 and 9.5% at December 31, 2013. All capital ratios exceed regulatory minimums to be considered well capitalized. The decline in the ratios reflects the repayment of the TARP investment and a reduction this quarter in 0% risk-weighted assets.

The Company issued shares of Series A Preferred Stock to the United States Department of the Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program in December 2008. During 2013, the Company repurchased 7,000 shares of the original 17,680 shares of Series A Preferred Stock. The Company funded the repurchases through the earnings of its banking subsidiary.

On April 23, 2014, the Company repurchased the remaining 10,680 shares of Series A Preferred Stock. The Company funded the repurchase through an unsecured third-party term loan (See Note 7). The form of the repurchase was a redemption under the terms of the TARP preferred stock. The Company paid the Treasury $10.9 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares.

On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant associated with the Series A Preferred Stock. The Company had originally issued the warrant, which permitted Treasury to purchase 780,000 shares of the Company’s common stock at an exercise price of $3.40, in December 2008. There are no other investments from the Company’s participation in TARP that remain outstanding.

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

 

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The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at June 30, 2014 and December 31, 2013 was as follows (dollars in thousands):

 

     June 30, 2014     December 31, 2013  

Cash and due from banks

   $ 13,865      $ 10,857   

Interest bearing bank deposits

     11,029        12,978   

Available for sale securities, at fair value, unpledged

     225,756        185,278   
  

 

 

   

 

 

 

Total liquid assets

   $ 250,650      $ 209,113   
  

 

 

   

 

 

 

Deposits and other liabilities

     1,012,730        982,873   

Ratio of liquid assets to deposits and other liabilities

     24.75     21.28

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of June 30, 2014 and December 31, 2013, is as follows (dollars in thousands):

 

     June 30, 2014      December 31, 2013  

Commitments with off-balance sheet risk:

     

Commitments to extend credit

   $ 72,421       $ 72,183   

Standby letters of credit

     7,310         9,978   
  

 

 

    

 

 

 

Total commitments with off-balance sheet risks

   $ 79,731       $ 82,161   
  

 

 

    

 

 

 

Commitments with balance sheet risk:

     

Loans held for sale

   $ —         $ 100   
  

 

 

    

 

 

 

Total commitments with balance sheet risks

     —           100   
  

 

 

    

 

 

 

Total commitments

   $ 79,731       $ 82,261   
  

 

 

    

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and updated monthly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 basis point upward shift and a 200 basis point downward shift in interest rates. A parallel shift in rates over a 12-month period is assumed. The following table represents the change to net interest income given interest rate shocks up and down 100 and 200 basis points at June 30, 2014:

 

     Change in net interest income  
             %                     $          

Change in Yield curve

    

+200 bp

     (3.6 )%    $ (1,382

+100 bp

     (2.3     (889

most likely

     0        —     

–100 bp

     1.7        663   

–200 bp

     (0.3     (100

At June 30, 2014, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points over a 12 month period, net interest income could decrease by 3.6%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could decrease by 0.3%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and its chief financial officer (“the Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated under it.

Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

 

Item 1A. Risk Factors

As of the date of this report, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit No.    Description
  31.1    Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
  31.2    Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
  32.1    Section 1350 Certifications*
101    Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) the Unaudited Consolidated Statements of Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

COMMUNITY BANKERS TRUST CORPORATION
(Registrant)
/s/ Rex L. Smith, III
Rex L. Smith, III
President and Chief Executive Officer
(principal executive officer)

Date: August 8, 2014

 

/s/ Bruce E. Thomas
Bruce E. Thomas
Executive Vice President and Chief Financial Officer      
(principal financial officer)

Date: August 8, 2014

 

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