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Section 1: 10-Q (FORM 10-Q)

hmta20180930_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 



 

FORM 10-Q

 

 


 

(Mark One)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2018. 

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: 333-158525

 

 


 

HOMETOWN BANKSHARES CORPORATION

(Exact name of the registrant as specified in its charter)

 

 


 

Virginia

26-4549960

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

  

  

202 South Jefferson Street,

Roanoke, Virginia

24011

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number: (540) 345-6000

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

 


 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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  ☒    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐ 

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

 

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

As of November 9, 2018, 5,809,789 shares of common stock, par value $5.00 per share, of the issuer were outstanding.

 

 

 

 

HOMETOWN BANKSHARES CORPORATION

Form 10-Q

 

INDEX

 

PART I. FINANCIAL INFORMATION

  

  

  

Item 1.

FINANCIAL STATEMENTS

  

  

  

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

  

  

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

4

  

  

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

5

  

  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)

6

  

  

Notes to Consolidated Financial Statements (unaudited)

7

  

  

  

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

  

  

  

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

  

  

  

Item 4.

CONTROLS AND PROCEDURES

31

  

PART II. OTHER INFORMATION

  

  

  

Item 1.

Legal Proceedings

32

  

  

  

Item 1A.

Risk Factors

32

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

  

  

  

Item 3.

Defaults Upon Senior Securities

32

  

  

  

Item 4.

Mine Safety Disclosure

32

  

  

 

Item 5.

Other Information

32

  

  

  

Item 6.

Exhibits

33

  

  

SIGNATURES

34

 

All schedules have been omitted because they are inapplicable or the required information is provided in the financial statements, including the notes thereto.

 

2

 

 

HomeTown Bankshares Corporation

Consolidated Balance Sheets

September 30, 2018 and December 31, 2017

 

Dollars In Thousands, Except Share and Per Share Data

 

September 30,

2018

   

December 31,

2017

 
   

(Unaudited)

      *  

Assets

               

Cash and due from banks

  $ 18,126     $ 21,714  

Federal funds sold

    193       180  

Securities available for sale, at fair value

    45,704       55,344  

Restricted equity securities, at cost

    2,359       2,371  

Loans held for sale

    1,378       1,587  

Loans, net of allowance for loan losses of $3,947 in 2018 and $3,758 in 2017

    462,396       440,437  

Property and equipment, net

    13,096       12,937  

Other real estate owned, net of valuation allowance of $954 in 2018 and $797 in 2017

    3,196       3,249  

Bank owned life insurance

    8,147       8,669  

Accrued income

    2,639       2,681  

Other assets

    1,507       1,084  

Total assets

  $ 558,741     $ 550,253  
                 

Liabilities and Stockholders’ Equity

               

Deposits:

               

Noninterest-bearing

  $ 121,598     $ 106,956  

Interest-bearing

    361,899       370,364  

Total deposits

    483,497       477,320  

Federal Home Loan Bank borrowings

    10,728       11,028  

Subordinated notes

    7,277       7,254  

Other borrowings

    1,348       1,558  

Accrued interest payable

    556       368  

Other liabilities

    2,365       1,833  

Total liabilities

    505,771       499,361  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Common stock, $5 par value; authorized 10,000,000 shares, issued and outstanding 5,809,789 (includes 42,495 restricted shares) at September 30, 2018 and 5,775,597 (includes 32,087 restricted shares) at December 31, 2017

    28,836       28,777  

Surplus

    18,151       17,980  

Retained earnings

    6,798       3,767  

Accumulated other comprehensive loss

    (1,158

)

    (141

)

Total HomeTown Bankshares Corporation stockholders’ equity

    52,627       50,383  

Noncontrolling interest in consolidated subsidiary

    343       509  

Total stockholders’ equity

    52,970       50,892  

Total liabilities and stockholders' equity

  $ 558,741     $ 550,253  

 

*Derived from consolidated audited financial statements.

See Notes to Consolidated Financial Statements

 

3

Table of Contents

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Income

For the three and nine months ended September 30, 2018 and 2017

 

   

For the Three Months

Ended September 30,

   

For the Nine Months

Ended September 30,

 

Dollars in Thousands, Except Share and Per Share Data

 

2018

   

2017

   

2018

   

2017

 
   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Interest and dividend income:

                               

Loans and fees on loans

  $ 5,344     $ 4,797     $ 15,374     $ 14,123  

Taxable investment securities

    262       244       824       744  

Nontaxable investment securities

    56       75       172       239  

Dividends on restricted stock

    38       33       111       98  

Other interest income

    48       68       138       160  

Total interest and dividend income

    5,748       5,217       16,619       15,364  

Interest expense:

                               

Deposits

    761       588       1,998       1,694  

Subordinated notes

    134       134       402       402  

Other borrowed funds

    85       58       243       171  

Total interest expense

    980       780       2,643       2,267  

Net interest income

    4,768       4,437       13,976       13,097  

Provision for loan losses

    24       40       371       575  

Net interest income after provision for loan losses

    4,744       4,397       13,605       12,522  
                                 

Noninterest income:

                               

Service charges on deposit accounts

    139       120       419       415  

ATM and interchange income

    265       206       754       612  

Mortgage banking

    195       263       587       725  

Gains on sales of investment securities, net

    -       18       60       60  

Income from life insurance death benefit

    -       -       642       -  

Other income

    165       150       478       675  

Total noninterest income

    764       757       2,940       2,487  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    2,113       2,099       6,465       6,153  

Occupancy and equipment expense

    416       391       1,253       1,245  

Data processing expense

    355       309       1,152       954  

ATM processing expense

    21       57       62       180  

Advertising and marketing expense

    136       112       491       383  

Professional fees

    76       89       350       454  

Bank franchise taxes

    106       100       313       299  

FDIC insurance expense

    26       78       182       181  

Losses on sales and write-downs of other real estate owned, net

    2       -       160       380  

Other real estate owned expense

    44       28       249       66  

Directors’ fees

    91       97       294       306  

Merger-related expense

    65       -       65       -  

Other expense

    407       444       1,289       1,308  

Total noninterest expense

    3,858       3,804       12,325       11,909  

Net income before income taxes

    1,650       1,350       4,220       3,100  

Income tax expense

    308       413       687       930  

Net income

    1,342       937       3,533       2,170  

Less net income attributable to non-controlling interest

    10       20       38       54  

Net income attributable to HomeTown Bankshares Corporation

  $ 1,332     $ 917     $ 3,495     $ 2,116  

Basic earnings per common share

  $ 0.23     $ 0.16     $ 0.60     $ 0.37  

Diluted earnings per common share

  $ 0.23     $ 0.16     $ 0.60     $ 0.37  

Weighted average common shares outstanding

    5,810,618       5,770,175       5,804,251       5,767,602  

Diluted weighted average common shares outstanding

    5,861,082       5,794,777       5,854,715       5,792,204  

 

See Notes to Consolidated Financial Statements

                                         

4

Table of Contents

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2018 and 2017

 

   

For the Three Months Ended

September 30,

   

For the Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Dollars In Thousands

 

(Unaudited)

   

(Unaudited)

   

(Unaudited)

   

(Unaudited)

 

Net income

  $ 1,342     $ 937     $ 3,533     $ 2,170  
                                 

Other comprehensive income (loss):

                               

Net unrealized holding gains (losses) on securities available for sale during the period

    (306

)

    (201

)

    (1,227

)

    307  

Deferred income tax benefit (expense) on unrealized holding gains on securities available for sale

    64       68       258       (104

)

Reclassification adjustment for gains on sales of investment securities included in net income

    -       (18

)

    (60

)

    (60

)

Tax expense related to realized gains on securities sold

    -       6       13       20  

Total other comprehensive income (loss)

    (242

)

    (145

)

    (1,016

)

    163  
                                 

Comprehensive income

    1,100       792       2,517       2,333  

Less: Comprehensive income attributable to the non-controlling interest

    10       20       38       54  

Comprehensive income attributable to HomeTown Bankshares Corporation

  $ 1,090     $ 772     $ 2,479     $ 2,279  

 

See Notes to Consolidated Financial Statements

 

5

Table of Contents

 

 

HomeTown Bankshares Corporation

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2018 and 2017

 

Dollars in Thousands

 

2018

   

2017

 
   

(Unaudited)

   

(Unaudited)

 

Cash flows from operating activities:

               

Net income

  $ 3,533     $ 2,170  

Adjustments to reconcile net income to net cash provided by operations:

               

Depreciation and amortization

    511       545  

Provision for loan losses

    371       575  

Amortization of premium on securities, net

    327       351  

Amortization of discount on subordinated notes

    23       23  

Gains on sales of loans held for sale

    (421

)

    (516

)

Losses on sales and writedowns of other real estate, net

    160       380  

Gains on sales of investment securities

    (60

)

    (60

)

Increase in value of life insurance contracts

    (152

)

    (146

)

Income from life insurance benefit

    (642

)

     

Stock compensation expense

    159       109  

Originations of loans held for sale

    (21,728

)

    (24,759

)

Proceeds from sales of loans held for sale

    22,358       24,940  

Changes in assets and liabilities:

               

Accrued income

    42       (330

)

Other assets

    104       (222

)

Deferred taxes, net

    (257

)

    (71

)

Accrued interest payable

    188       122  

Other liabilities

    538       227  

Net cash flows provided by operating activities

    5,054       3,338  

Cash flows from investing activities:

               

Net increase in federal funds sold

    (13

)

    (90

)

Purchases of available for sale securities

    (900

)

    (18,099

)

Sales, maturities, and calls of available for sale securities

    8,986       17,436  

Redemption (purchase) of restricted equity securities, net

    12       (158

)

Net increase in loans

    (23,027

)

    (17,074

)

Purchase of other real estate at foreclosure

          (274

)

Proceeds from sales of other real estate

    590       876  

Purchase of bank owned life insurance

          (500

)

Death benefit from bank owned life insurance

    1,316        

Supplemental executive retirement plan payments

    (6

)

     

Purchases of property and equipment

    (670

)

    (272

)

Net cash flows used in investing activities

    (13,712

)

    (18,155

)

Cash flows from financing activities:

               

Net increase in noninterest-bearing deposits

    14,642       18,895  

Net increase (decrease) in interest-bearing deposits

    (8,465

)

    9,201  

Net increase (decrease) in FHLB borrowings

    (300

)

    3,361  

Net decrease in other borrowings

    (210

)

    (125

)

Distribution of equity of noncontrolling interest

    (204

)

     

Common stock cash dividends paid

    (464

)

     

Exercise of stock options

    91       28  

Net settlement of vested restricted stock

    (20

)

    (17

)

Net cash flows provided by financing activities

    5,070       31,343  

Net increase (decrease) in cash and cash equivalents

    (3,588

)

    16,526  

Cash and cash equivalents, beginning

    21,714       18,229  

Cash and cash equivalents, ending

  $ 18,126     $ 34,755  

Supplemental disclosure of cash flow information:

               

Cash payments for interest

  $ 2,455     $ 2,122  

Cash payments for income taxes

  $ 790     $ 1,211  

Supplemental disclosure of noncash investing and financing activities:

               

Transfer from loans to other real estate owned

  $ 697     $ 750  

Change in unrealized gains and losses on available for sale securities

  $ (1,287

)

  $ 247  

 

 

See Notes to Consolidated Financial Statements

 

 

6

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies

 

Organization

On September 4, 2009, Hometown Bankshares Corporation (the “Company”) acquired all outstanding stock of HomeTown Bank (the “Bank”) in an exchange for shares of the Company on a one-for-one basis to become a single-bank holding company with the Bank becoming a wholly-owned subsidiary. The Bank was organized and incorporated under the laws of the State of Virginia on November 9, 2004 and commenced operations on November 14, 2005. The Bank currently serves Roanoke City, Virginia, the County of Roanoke, Virginia, the City of Salem, Virginia, Christiansburg, Virginia, and surrounding areas. As a state chartered bank which is a member of the Federal Reserve System, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Board.

 

On October 1, 2018, the Company and American National Bankshares, Inc. (“American National”) announced a definitive agreement to combine in a strategic merger (the “Merger Agreement”) pursuant to which the Company will merge with and into American National (the “Merger”). As a result of the Merger, the holders of shares of the Company's common stock will receive 0.4150 shares of American National common stock for each share of the Company's common stock held immediately prior to the effective date of the Merger. The transaction is expected to be completed in the first quarter of 2019, subject to approval of both companies' shareholders, regulatory approvals and other customary closing conditions.

 

In preparing these financial statements, management has evaluated all other subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no additional material subsequent events to be disclosed.

 

Basis of Presentation

The consolidated financial statements as of September 30, 2018 and for the periods ended September 30, 2018 and 2017 included herein, have been prepared by HomeTown Bankshares Corporation, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

 

Management believes that all interim adjustments for the periods ended September 30, 2018 are of a normal recurring nature. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for such interim periods. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2017, included in the Company’s Form 10-K for the year ended December 31, 2017. Interim financial performance is not necessarily indicative of performance for the full year.

 

The accounting and reporting policies of the Company follow generally accepted accounting principles and general practices within the financial services industry.

 

The consolidated financial statements of HomeTown Bankshares Corporation include the accounts of its wholly-owned subsidiary HomeTown Bank and the accounts of its subsidiary, HomeTown Residential Mortgage LLC. HomeTown Bank owns a 49% interest in HomeTown Residential Mortgage LLC which originates and sells mortgages secured by personal residences. Due to the marketing support and direction provided by HomeTown Bank to HomeTown Residential Mortgage LLC, along with guarantees of warehouse lines of credit used in its operation, the Company is deemed to exercise control of this entity. The ownership interest in HomeTown Residential Mortgage LLC not owned by the Company is reported as Non-Controlling Interest in a Consolidated Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Except as noted below, the Company’s accounting policies and basic principles have not changed since the summary disclosure of these in our Annual Report on Form 10-K. Please refer to Form 10-K for these policies.

 

Adoption of New Accounting Standards

During the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-01, among other things: (1) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (4) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (2) above, the Company measured the fair value of its loan and deposit portfolios as of September 30, 2018 using an exit price notion (see Note 7 Fair Value Measurement).

 

7

 

During the first quarter of 2018, the Company adopted ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." This standard is on the recognition of revenue from contracts with customers with the core principle being for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are in scope of the guidance are primarily related to service charges on deposit accounts, cardholder and merchant income, other service charges and fees, sales of other real estate and miscellaneous fees. We have performed an analysis of contracts for customer service charges, ATM fees and miscellaneous income. The adoption of ASU 2016-10 did not have a material impact on our consolidated financial statements.

  

Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2016-10 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated previously, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

 

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

 

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

 

Annuity and Insurance

Annuity and insurance income primarily consists of commissions received on annuity product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailer fees on annuity sales. The majority of the trailer fees relates to variable annuity products and are calculated based on a percentage of market value at period end. Revenue is not recognized until the annuity’s market value can be determined.

 

Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisor fees from wealth management products, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from wealth management products are earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

 

8

 

 

Note 2. Investment Securities

 

The amortized cost and fair value of available-for-sale securities as of September 30, 2018 and December 31, 2017, are as follows:

 

(Dollars In Thousands)

 

September 30, 2018

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

U. S. Government agency securities

  $ 11,130     $ 9     $ (339

)

  $ 10,800  

Mortgage-backed securities and CMO’s

    20,279       -       (954

)

    19,325  

Corporate securities

    6,641       21       (74

)

    6,588  

Municipal securities

    9,120       64       (193

)

    8,991  
    $ 47,170     $ 94     $ (1,560

)

  $ 45,704  

 

(Dollars In Thousands)

 

December 31, 2017

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

U. S. Government agency securities

  $ 13,475     $ 61     $ (101

)

  $ 13,435  

Mortgage-backed securities and CMO’s

    24,344       12       (375

)

    23,981  

Corporate securities

    6,991       118       (42

)

    7,067  

Municipal securities

    10,713       213       (65

)

    10,861  
    $ 55,523     $ 404     $ (583

)

  $ 55,344  

   

 U. S. Government agency securities: The unrealized losses on thirty-two of the Company’s investments in obligations of the U. S. government were caused by increases in market interest rates over the yields available at the time the securities were purchased.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments before recovery of their amortized cost basis which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

 

Mortgage-backed securities and CMO’s: The unrealized losses on thirty-seven of the Company’s investments in government-sponsored entity mortgage-backed securities and collateralized mortgage obligations (“CMOs”) were caused by increases in market interest rates over the yields available at the time the securities were purchased. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

 

Corporate securities: The unrealized losses on five of the Company’s investments in corporate securities were caused by increases in market interest rates over the yields available at the time the securities were purchased.  Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

 

Municipal securities: The unrealized losses on ten of the Company’s investments in municipal securities were caused by increases in market interest rates over the yields available at the time the securities were purchased. All municipal securities are investment grade. Because the decline in market value is attributable to changes in interest rates, credit spreads, and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

 

9

 

The following tables demonstrate the unrealized loss position of available-for-sale securities at September 30, 2018 and December 31, 2017. This information summarizes the amount of time individual securities have been in a continuous, unrealized loss position.

 

   

September 30, 2018

 
   

Less than 12 months

   

12 months or more

   

Total

 

(Dollars In Thousands)

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U. S. Government agency securities

  $ 3,717     $ (76

)

  $ 6,330     $ (263

)

  $ 10,047     $ (339

)

Mortgage-backed securities and CMO’s

    4,567       (211

)

    14,758       (743

)

    19,325       (954

)

Corporate securities

    1,661       (38

)

    1,446       (36

)

    3,107       (74

)

Municipal securities

    1,781       (36

)

    2,670       (157

)

    4,451       (193

)

    $ 11,726     $ (361

)

  $ 25,204     $ (1,199

)

  $ 36,930     $ (1,560

)

 

   

December 31, 2017

 
   

Less than 12 months

   

12 months or more

   

Total

 

(Dollars In Thousands)

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U.S. Government agency securities

  $ 6,859     $ (44

)

  $ 2,995     $ (57

)

  $ 9,854     $ (101

)

Mortgage-backed securities and CMO’s

    15,624       (192

)

    7,386       (183

)

    23,010       (375

)

Corporate securities

    1,438       (42

)

    -       -       1,438       (42

)

Municipal securities

    453       (3

)

    2,332       (62

)

    2,785       (65

)

    $ 24,374     $ (281

)

  $ 12,713     $ (302

)

  $ 37,087     $ (583

)

 

There are 84 debt securities with fair values totaling $36.9 million considered temporarily impaired at September 30, 2018.  As of September 30, 2018, the Company does not consider any bond in an unrealized loss position to be other-than-temporarily impaired.

 

The Company realized gains of $69 thousand and $9 thousand of losses on sales of securities in the first nine months of 2018. The Company realized gains of $165 thousand and $105 thousand of losses during the same period last year.

 

The amortized cost and fair values of investment securities available for sale at September 30, 2018, by contractual maturity are as follows:

 

(Dollars In Thousands)

 

Amortized

Cost

   

Fair

Value

 

One year or less

  $ 250     $ 248  

Over one through five years

    2,462       2,401  

Over five through ten years

    14,010       13,797  

Greater than 10 years

    30,448       29,258  
    $ 47,170     $ 45,704  

 

10

 

 

 Note 3. Loans Receivable

 

The major classifications of loans in the consolidated balance sheets at September 30, 2018 and December 31, 2017 were as follows:

 

(Dollars In Thousands)

 

September 30,

2018

   

December 31,

2017

 

Construction loans:

               

Residential

  $ 19,062     $ 15,221  

Land acquisition, development & commercial

    26,048       35,601  

Real estate:

               

Residential

    141,728       121,649  

Commercial

    187,894       173,999  

Commercial, industrial & agricultural

    54,782       61,129  

Equity lines

    28,675       28,835  

Consumer

    8,003       7,693  

Overdrafts

    151       68  

Total

    466,343       444,195  

Less allowance for loan losses

    (3,947

)

    (3,758

)

Loans, net

  $ 462,396     $ 440,437  

  

The past due and nonaccrual status of loans as of September 30, 2018 was as follows:

 

(Dollars In Thousands)

 

30-59

Days

Past Due

   

60-89

Days

Past Due

   

90 Days or

More

Past Due

   

Total Past

Due

   

Current

   

Total

Loans

   

Nonaccrual

Loans

 

Construction loans:

                                                       

Residential

  $     $     $     $     $ 19,062     $ 19,062     $  

Land acquisition, development & commercial

    253                   253       25,795       26,048       124  

Real estate:

                                                       

Residential

    870       73             943       140,785       141,728       546  

Commercial

    136       83             219       187,675       187,894       468  

Commercial, industrial & agricultural

    28       46             74       54,859       54,933       169  

Equity lines

    303       104             407       28,268       28,675       147  

Consumer

    2                   2       8,001       8,003        

Total

  $ 1,592     $ 306     $     $ 1,898     $ 464,445     $ 466,343     $ 1,454  

 

The past-due and nonaccrual status of loans as of December 31, 2017 was as follows:

 

(Dollars In Thousands)

 

30-59

Days

Past-Due

   

60-89

Days

Past-Due

   

90 Days or

More

Past-Due

   

Total Past-

Due

   

Current

   

Total

Loans

   

Nonaccrual

Loans

 

Construction:

                                                       

Residential

  $     $     $     $     $ 15,221     $ 15,221     $  

Land acquisition, development & commercial

    43             274       317       35,284       35,601       274  

Real Estate:

                                                       

Residential

    589       870       546       2,005       119,644       121,649       173  

Commercial

    278       19       209       506       173,493       173,999       209  

Commercial, industrial & agricultural

    130       143       392       665       60,532       61,197       403  

Equity lines

    544       49             593       28,242       28,835       49  

Consumer

    17       2       36       55       7,638       7,693       36  

Total

  $ 1,601     $ 1,083     $ 1,457     $ 4,141     $ 440,054     $ 444,195     $ 1,144  

 

There were no loans which were past due ninety days or more and still accruing interest as of September 30, 2018. There was one loan, totaling $373 thousand, which was past due ninety days or more and still accruing interest at December 31, 2017.

 

11

 

Impaired loans, which include TDR’s of $4.0 million, and the related allowance at September 30, 2018, were as follows:

 

September 30, 2018

With no related allowance:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

    43       43             43       1  

Real estate:

                                       

Residential

    667       667             683       16  

Commercial

    4,264       4,264             4,367       120  

Commercial, industrial & agricultural

    180       180             185       2  

Equity lines

    298       298             298       10  

Consumer

                             

Total loans with no allowance

  $ 5,452     $ 5,452     $     $ 5,576     $ 149  

   

September 30, 2018

With an allowance recorded:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total

Loans

   

Interest

Income

Recognized

 

Construction loans:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real estate:

                                       

Residential

                             

Commercial

                             

Commercial, industrial & agricultural

                             

Equity lines

                             

Consumer

                             

Total loans with an allowance

  $     $     $     $     $  

 

Impaired loans, which include TDRs of $4.1 million, and the related allowance at December 31, 2017, were as follows:

 

December 31, 2017

With no related allowance:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total Loans

   

Interest

Income

Recognized

 

Construction:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

    181       331             331       10  

Real Estate:

                                       

Residential

    360       640             638       30  

Commercial

    4,098       4,273             4,166       161  

Commercial, industrial & agricultural

    379       379             379       15  

Equity lines

    299       299             300       14  

Consumer

                             

Total loans with no allowance

  $ 5,317     $ 5,922     $     $ 5,814     $ 230  

 

December 31, 2017

With an allowance recorded:

(Dollars In Thousands)

 

Recorded

Investment

in Loans

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Balance

Total Loans

   

Interest

Income

Recognized

 

Construction:

                                       

Residential

  $     $     $     $     $  

Land acquisition, development & commercial

                             

Real Estate:

                                       

Residential

                             

Commercial

                      54        

Commercial, industrial & agricultural

                             

Equity lines

                             

Consumer

                             

Total loans with an allowance

  $     $     $     $ 54     $  

 

12

 

Troubled Debt Restructurings

 

At September 30, 2018, four loans totaling $4.0 million were classified as troubled debt restructurings (“TDRs”). This compares to four loans totaling $4.1 million at December 31, 2017. Two of the four loans totaling $3.8 million were performing in accordance with their restructured terms and were not on nonaccrual status at September 30, 2018. The other two loans to one borrower totaled $200 thousand and were on nonaccrual status at September 30, 2018.

 

No loans were modified in a TDR during the first nine months of 2018 or 2017.

 

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, if a specific reserve is associated with the loan it may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Management exercises significant judgment in developing estimates for potential losses associated with TDRs.

 

 

Note 4. Allowance for Loan Losses

 

The following table presents, as of September 30, 2018, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

 

September 30, 2018

 

Allowance for loan losses

   

Loans

 

Class of Loan

(Dollars in Thousands)

 

Beginning

balance

   

Charge-

offs

   

Recoveries

   

Provisions

   

Ending

balance

   

Ending

balance:

individually

evaluated

for

impairment

   

Ending

balance:

collectively

evaluated

for

impairment

   

Ending

balance

   

Ending

balance:

individually

evaluated

for

impairment

   

Ending

balance:

collectively

evaluated

for

impairment

 

Construction loans:

                                                                               

Residential

  $ 94     $     $ 10     $ 7     $ 111     $     $ 111     $ 19,062     $     $ 19,062  

Land acquisition, development & commercial

    311                   (97

)

    214             214       26,048       43       26,005  

Real estate:

                                                                             

Residential

    955       (96

)

    30       200       1,089             1,089       141,728       667       141,061  

Commercial

    1,603             1       147       1,751             1,751       187,894       4,264       183,630  

Commercial, industrial & agricultural

    441       (37

)

    2       (11

)

    395             395       54,933       180       54,753  

Equity lines

    237                   (27

)

    210             210       28,675       298       28,377  

Consumer

    108       (114

)

    22       98       114             114       8,003             8,003  

Unallocated

    9                   54       63             63                    

Total

  $ 3,758     $ (247

)

  $ 65     $ 371     $ 3,947     $     $ 3,947     $ 466,343     $ 5,452     $ 460,891  

 

The following table presents, as of December 31, 2017, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

 

December 31, 2017

 

Allowance for loan losses

   

Loans

 

Class of Loan

(Dollars in Thousands)

 

Beginning

balance

   

Charge-

offs

   

Recoveries

   

Provisions

   

Ending

balance

   

Ending

balance:

individually

evaluated

for

impairment

   

Ending

balance:

collectively

evaluated

for

impairment

   

Ending

balance

   

Ending

balance:

individually

evaluated

for

impairment

   

Ending

balance:

collectively

evaluated

for

impairment

 

Construction loans:

                                                                               

Residential

  $ 63     $     $     $ 31     $ 94     $     $ 94     $ 15,221     $     $ 15,221  

Land acquisition, development & commercial

    173       (150

)

          288       311             311       35,601       181       35,420  

Real estate:

                                                                               

Residential

    866       (293

)

          382       955             955       121,649       360       121,289  

Commercial

    1,516       (454

)

    43       498       1,603             1,603       173,999       4,098       169,901  

Commercial, industrial & agricultural

    461       (80

)

          60       441             441       61,197       379       60,818  

Equity lines

    338                   (101

)

    237             237       28,835       299       28,536  

Consumer

    97       (101

)

    15       97       108             108       7,693             7,693  

Unallocated

    122                   (113

)

    9             9                    

Total

  $ 3,636     $ (1,078

)

  $ 58     $ 1,142     $ 3,758     $     $ 3,758     $ 444,195     $ 5,317     $ 438,878  

 

13

  

Loans by credit quality indicators as of September 30, 2018 were as follows:

 

(Dollars in Thousands)

 

Pass

Accruing

   

Special

Mention

Accruing

   

Special

Mention

Nonaccrual

   

Substandard

Accruing

   

Substandard

Nonaccrual

   

Doubtful

Nonaccrual

   

Total

 
                                                         

Construction loans:

                                                       

Residential

  $ 19,062     $     $     $     $     $     $ 19,062  

Land acquisition, development & commercial

    25,465             82       458       43             26,048  

Real estate loans:

                                                       

Residential

    140,428       369       255       385       236       55       141,728  

Commercial

    184,717       2,137             573       467             187,894  

Commercial, industrial, agricultural

    54,593       171                   169             54,933  

Equity lines

    28,230             147       298                   28,675  

Consumer

    8,003                                     8,003  

Total Loans

  $ 460,498     $ 2,677     $ 484     $ 1,714     $ 915     $ 55     $ 466,343  

 

Loans by credit quality indicators as of December 31, 2017 were as follows:

 

(Dollars in Thousands)

 

Pass

   

Special

Mention

   

Substandard

Accruing

   

Substandard

Nonaccrual

   

Doubtful

Nonaccrual

   

Total

 

Construction loans:

                                               

Residential

  $ 15,221     $     $     $     $     $ 15,221  

Land acquisition, development & commercial

    31,433       3,987             181             35,601  

Real estate loans:

                                               

Residential

    120,575       342       559             173       121,649  

Commercial

    165,760       7,386       644       209             173,999  

Commercial, industrial, agricultural

    59,042       1,249       503       379       24       61,197  

Equity lines

    28,536             299                   28,835  

Consumer

    7,658                   35             7,693  

Total Loans

  $ 428,225     $ 12,964     $ 2,005     $ 804     $ 197     $ 444,195  

 

At September 30, 2018 and December 31, 2017, the Company does not have any loans classified as Loss.

 

14

 

 

Note 5. Other Real Estate Owned

 

Changes in other real estate owned for the nine months ended September 30, 2018 were as follows:

 

(Dollars in Thousands)

 

Other Real

Estate Owned

   

Valuation

Allowance

   

Net

 

Balance at the beginning of the year

  $ 4,046     $ (797

)

  $ 3,249  

Additions

    697             697  

Write downs

          (157

)

    (157

)

Sales

    (593

)

          (593

)

Balance at the end of the period

  $ 4,150     $ (954

)

  $ 3,196  

 

Changes in other real estate owned for the nine months ended September 30, 2017 were as follows:

 

(Dollars in Thousands)

 

Other Real

Estate Owned

   

Valuation

Allowance

   

Net

 

Balance at the beginning of the year

  $ 4,619     $ (825

)

  $ 3,794  

Additions

    1,024             1,024  

Write downs

          (380

)

    (380

)

Sales

    (1,492

)

    616       (876

)

Balance at the end of the period

  $ 4,151     $ (589

)

  $ 3,562  

 

The major classifications of other real estate owned in the consolidated balance sheets at September 30, 2018 and December 31, 2017 were as follows:

 

(Dollars in Thousands)

 

September 30,

2018

   

December 31,

2017

 

Residential lots

  $ 1,243