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ESXB Community Bankers Trust

Filed: 6 Nov 20, 2:17pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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)

(804934-9999

(Registrant’s telephone number, including area code)

n/a

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $0.01 par value

ESXB

The NASDAQ Stock Market, LLC

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   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit. such files). Yes  No 

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

At September 30, 2020, there were 22,321,000 shares of the Company’s common stock outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(dollars in thousands, except share data)

    

September 30, 2020

    

December 31, 2019 *

ASSETS

Cash and due from banks

$

18,689

$

16,976

Interest bearing bank deposits

 

56,795

 

11,708

Total cash and cash equivalents

 

75,484

 

28,684

Securities available for sale, at fair value

 

233,653

 

186,969

Securities held to maturity, at cost (fair value of $24,118 and $36,633, respectively)

 

23,026

 

35,733

Equity securities, restricted, at cost

 

8,875

 

8,855

Total securities

 

265,554

 

231,557

Loans held for sale

 

1,151

 

501

Loans

 

1,177,709

 

1,058,323

Purchased credit impaired (PCI) loans

 

27,146

 

32,528

Total loans

 

1,204,855

 

1,090,851

Allowance for loan losses (loans of $12,328 and $8,429, respectively; PCI loans of $156 and $156, respectively)

 

(12,484)

 

(8,585)

Net loans

 

1,192,371

 

1,082,266

Bank premises and equipment, net

 

28,197

 

29,472

Bank premises and equipment held for sale

 

1,589

 

1,589

Right-of-use lease assets

5,766

6,472

Other real estate owned

 

4,416

 

4,527

Bank owned life insurance

 

29,858

 

29,340

Other assets

 

17,851

 

16,432

Total assets

$

1,622,237

$

1,430,840

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Noninterest bearing

$

281,679

$

178,584

Interest bearing

 

1,087,663

 

984,864

Total deposits

 

1,369,342

 

1,163,448

Federal funds purchased

 

940

 

24,437

Federal Home Loan Bank borrowings

 

68,000

 

68,500

Trust preferred capital notes

 

4,124

 

4,124

Lease liabilities

6,027

6,737

Other liabilities

 

8,014

 

8,115

Total liabilities

 

1,456,447

 

1,275,361

SHAREHOLDERS’ EQUITY

 

  

 

  

Common stock (200,000,000 shares authorized, $0.01 par value; 22,321,000 and 22,422,621 shares issued and outstanding, respectively)

 

223

 

224

Additional paid in capital

 

150,708

 

150,728

Retained earnings

 

9,300

 

2,562

Accumulated other comprehensive income

 

5,559

 

1,965

Total shareholders’ equity

 

165,790

 

155,479

Total liabilities and shareholders’ equity

$

1,622,237

$

1,430,840

*

Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

3

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

    

Three months ended

Nine months ended

September 30, 2020

    

September 30, 2019

September 30, 2020

    

September 30, 2019

Interest and dividend income

 

  

 

  

  

 

  

Interest and fees on loans

$

12,760

$

13,187

$

38,858

$

38,246

Interest and fees on PCI loans

 

962

 

2,333

 

3,121

 

4,877

Interest on federal funds sold

 

 

9

 

 

14

Interest on deposits in other banks

 

121

 

87

 

231

 

300

Interest and dividends on securities

 

 

 

 

Taxable

 

1,362

 

1,489

 

4,000

 

4,483

Nontaxable

 

344

 

355

 

1,036

 

1,252

Total interest and dividend income

 

15,549

 

17,460

 

47,246

 

49,172

Interest expense

 

  

 

  

 

  

 

  

Interest on deposits

 

2,614

 

3,698

 

9,215

 

10,521

Interest on borrowed funds

 

222

 

343

 

720

 

1,107

Total interest expense

 

2,836

 

4,041

 

9,935

 

11,628

Net interest income

 

12,713

 

13,419

 

37,311

 

37,544

Provision for loan losses

 

 

 

4,200

 

125

Net interest income after provision for loan losses

 

12,713

 

13,419

 

33,111

 

37,419

Noninterest income

 

  

 

  

 

  

 

  

Service charges and fees

 

613

 

758

 

1,817

 

2,074

Gain on securities transactions, net

 

78

 

50

 

281

 

274

Gain on sale of other loans

 

 

 

11

 

Income on bank owned life insurance

 

171

 

181

 

518

 

546

Mortgage loan income

 

228

 

176

 

822

 

338

Other

 

382

 

346

 

974

 

744

Total noninterest income

 

1,472

 

1,511

 

4,423

 

3,976

Noninterest expense

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

5,041

 

5,289

 

14,806

 

15,943

Occupancy expenses

 

815

 

813

 

2,420

 

2,662

Equipment expenses

 

330

 

377

 

1,047

 

1,152

FDIC assessment

 

174

 

4

 

455

 

316

Data processing fees

 

656

 

594

 

1,821

 

1,741

Other real estate expense, net

 

87

 

565

 

89

 

662

Other operating expenses

 

1,423

 

1,588

 

4,355

 

4,585

Total noninterest expense

 

8,526

 

9,230

 

24,993

 

27,061

Income before income taxes

 

5,659

 

5,700

 

12,541

 

14,334

Income tax expense

 

1,143

 

1,087

 

2,450

 

2,674

Net income

$

4,516

$

4,613

$

10,091

$

11,660

Net income per share — basic

$

0.20

$

0.21

$

0.45

$

0.52

Net income per share — diluted

$

0.20

$

0.20

$

0.45

$

0.52

Weighted average number of shares outstanding

 

  

 

  

 

  

 

  

Basic

 

22,312

 

22,303

 

22,339

 

22,224

Diluted

 

22,503

 

22,561

 

22,534

 

22,475

See accompanying notes to unaudited consolidated financial statements

4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

Three months ended

Nine months ended

    

September 30, 2020

    

September 30, 2019

    

September 30, 2020

    

September 30, 2019

Net income

$

4,516

$

4,613

$

10,091

$

11,660

Other comprehensive income:

Unrealized gain on investment securities:

Change in unrealized gain on investment securities

 

1,735

 

1,215

 

5,527

 

5,818

Tax related to unrealized gain on investment securities

 

(382)

 

(267)

 

(1,215)

 

(1,279)

Reclassification adjustment for gain on securities sold

 

(78)

 

(50)

 

(281)

 

(274)

Tax related to realized gain on securities sold

 

17

 

11

 

62

 

60

Cash flow hedge:

Change in unrealized gain (loss) on cash flow hedge

 

47

 

(156)

 

(639)

 

(395)

Tax related to cash flow hedge

 

(10)

 

34

 

140

 

86

Total other comprehensive income

 

1,329

 

787

 

3,594

 

4,016

Total comprehensive income

$

5,845

$

5,400

$

13,685

$

15,676

See accompanying notes to unaudited consolidated financial statements

5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

Accumulated

Additional

Retained

Other

Common Stock

Paid in

Earnings

Comprehensive

    

Shares

    

Amount

    

Capital

    

(Deficit)

    

Income (Loss)

    

Total

Balance June 30, 2019

 

22,258

$

223

$

149,752

$

(4,529)

$

1,950

$

147,396

Issuance of common stock

 

7

 

 

54

 

 

 

54

Exercise and issuance of employee stock options

 

70

 

 

458

 

 

 

458

Net income

 

 

 

 

4,613

 

 

4,613

Dividends of $0.03 per share paid on common stock

 

 

 

 

(670)

 

 

(670)

Other comprehensive income

 

787

787

Balance September 30, 2019

 

22,335

$

223

$

150,264

$

(586)

$

2,737

$

152,638

Balance December 31, 2018

22,132

$

221

$

148,763

$

(10,244)

$

(1,279)

$

137,461

Issuance of common stock

 

21

 

 

161

 

 

 

161

Exercise and issuance of employee stock options

 

182

 

2

 

1,340

 

 

 

1,342

Net income

 

 

 

 

11,660

 

 

11,660

Dividends of $0.09 per share paid on common stock

 

 

 

(2,002)

 

 

(2,002)

Other comprehensive income

 

 

 

 

 

4,016

 

4,016

Balance September 30, 2019

 

22,335

$

223

$

150,264

$

(586)

$

2,737

$

152,638

Balance June 30, 2020

 

22,311

$

223

$

150,428

$

5,900

$

4,230

$

160,781

Issuance of common stock

 

10

 

 

49

 

 

 

49

Exercise and issuance of employee stock options

 

 

 

231

 

 

 

231

Net income

 

 

 

 

4,516

 

 

4,516

Dividends of $0.05 per share paid on common stock

 

 

 

 

(1,116)

 

 

(1,116)

Other comprehensive income

 

1,329

1,329

Balance September 30, 2020

 

22,321

$

223

$

150,708

$

9,300

$

5,559

$

165,790

Balance December 31, 2019

22,423

$

224

$

150,728

$

2,562

$

1,965

$

155,479

Issuance of common stock

 

25

 

 

152

 

 

 

152

Exercise and issuance of employee stock options

 

4

 

 

705

 

 

 

705

Stock purchased under stock repurchase program

(131)

(1)

(877)

(878)

Net income

 

 

 

 

10,091

 

 

10,091

Dividends of $0.15 per share paid on common stock

 

 

 

(3,353)

 

 

(3,353)

Other comprehensive income

 

 

 

 

 

3,594

 

3,594

Balance September 30, 2020

 

22,321

$

223

$

150,708

$

9,300

$

5,559

$

165,790

See accompanying notes to unaudited consolidated financial statements

6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands)

    

September 30, 2020

    

September 30, 2019

Operating activities:

Net income

$

10,091

$

11,660

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

Depreciation

 

1,379

 

1,552

Right-of-use lease asset amortization

706

699

Stock-based compensation expense

 

846

 

804

Tax benefit of exercised stock options

 

(6)

 

(150)

Amortization of purchased loan premium

 

229

 

236

Provision for loan losses

 

4,200

 

125

Amortization of security premiums and accretion of discounts, net

 

574

 

905

Net gain on sale of securities

 

(281)

 

(274)

Net gain on sale and valuation of other real estate owned

 

(23)

 

(81)

Net gain on sale of loans

 

(11)

 

Originations of mortgages held for sale

 

(26,112)

 

(13,227)

Proceeds from sales of mortgages held for sale

 

25,462

 

13,373

Net loss on disposal of premises and equipment

82

Increase in bank owned life insurance investment

 

(518)

 

(327)

Changes in assets and liabilities:

 

 

Increase in other assets

 

(2,086)

 

(661)

Decrease in accrued expenses and other liabilities

 

(1,446)

 

(117)

Net cash provided by operating activities

 

13,086

 

14,517

Investing activities:

 

  

 

  

Proceeds from sales/calls/maturities/paydowns of available for sale securities

 

66,171

 

75,128

Proceeds from calls/maturities/paydowns of held to maturity securities

 

12,640

 

3,835

Proceeds from sales of restricted equity securities

 

1,700

 

866

Purchase of available for sale securities

 

(107,834)

 

(53,589)

Purchase of restricted equity securities

 

(1,720)

 

(1,995)

Proceeds from sale of other real estate owned

 

134

 

638

Net increase in loans

 

(115,608)

 

(42,707)

Principal recoveries of loans previously charged off

 

453

 

363

Purchase of premises and equipment, net

 

(186)

 

(121)

Purchase small business investment company fund investment

 

(345)

 

(875)

Proceeds from sale of loans

 

632

 

705

Net cash used in investing activities

 

(143,963)

 

(17,752)

Financing activities:

 

  

 

  

Net increase in deposits

 

205,894

 

12,267

Net decrease in federal funds purchased

 

(23,497)

 

(19,369)

Net increase in short-term Federal Home Loan Bank borrowings

 

 

5,000

Proceeds from long-term Federal Home Loan Bank borrowings

 

40,000

 

10,137

Payments on long-term Federal Home Loan Bank borrowings

 

(40,500)

 

(917)

Proceeds from issuance of common stock

 

11

 

698

Cash dividends paid

(3,353)

(2,002)

Repurchase of common stock

 

(878)

 

Net cash provided by financing activities

 

177,677

 

5,814

Net increase in cash and cash equivalents

 

46,800

 

2,579

Cash and cash equivalents:

 

  

 

  

Beginning of the period

 

28,684

 

34,219

End of the period

$

75,484

$

36,798

Supplemental disclosures of cash flow information:

 

  

 

  

Interest paid

$

10,312

$

11,554

Income taxes paid

 

3,306

 

2,195

Transfers of loans to other real estate owned

 

 

4,198

Right-of-use lease assets in exchange for lease liability

7,408

Transfers of building premises and equipment to held for sale

 

 

337

See accompanying notes to unaudited consolidated financial statements

7

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

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 24 full-service offices, 18 of which are in Virginia and 6 of which are in Maryland. The Bank also operates 2 loan production offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, 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 cash management services.

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, 2019. 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 September 30, 2020, the statements of income and comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, 2020, and the statements of cash flows for the nine months ended September 30, 2020. Results for the nine month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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.

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 Developments

In October 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs. This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  Early adoption is not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

8

In March 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides relief from certain requirements under GAAP. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under FASB ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, in certain situations. Under FASB ASC 310-40, a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Section 4013 of the CARES Act permits the suspension of FASB ASC 310-40 for loan modifications that are made by financial institutions in response to the coronavirus (COVID-19) pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan.  These modifications must be made between March 1, 2020 and the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning COVID–19 declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates (the “applicable period”).

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the “agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The agencies noted that there are circumstances in which a loan modification may not be eligible for non-TDR treatment under Section 4013 of the CARES Act or in which an institution elects not to apply Section 4013. For example, a loan that is modified after the end of the applicable period would not be eligible under Section 4013. For such loans, the agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the impact of COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The interagency statement was effective immediately.

The CARES Act and interagency statement are expected to have a material impact on the Company’s financial statements; however, due to the uncertainties regarding the economic effects of COVID-19, this impact cannot be quantified at this time.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):

September 30, 2020

Gross Unrealized

  

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

12,500

$

$

$

12,500

U.S. Government agencies

19,942

83

(280)

19,745

State, county and municipal

 

109,976

 

6,608

 

(50)

 

116,534

Mortgage backed securities

 

28,086

 

1,865

 

 

29,951

Asset backed securities

 

28,748

 

373

 

(135)

 

28,986

Corporate bonds

 

25,454

 

496

 

(13)

 

25,937

Total Securities Available for Sale

$

224,706

$

9,425

$

(478)

$

233,653

Securities Held to Maturity

 

  

 

  

 

  

 

  

State, county and municipal

$

23,026

$

1,092

$

$

24,118

Total Securities Held to Maturity

$

23,026

$

1,092

$

$

24,118

9

December 31, 2019

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

U.S. Government agencies

$

22,104

$

51

$

(219)

$

21,936

State, county and municipal

 

95,467

 

3,167

 

(42)

 

98,592

Mortgage backed securities

 

48,045

 

808

 

(113)

 

48,740

Asset backed securities

 

11,637

 

49

 

(82)

 

11,604

Corporate bonds

 

6,016

 

84

 

(3)

 

6,097

Total Securities Available for Sale

$

183,269

$

4,159

$

(459)

$

186,969

Securities Held to Maturity

 

  

 

  

 

  

 

  

U.S. Government agencies

$

10,000

$

$

(12)

$

9,988

State, county and municipal

 

25,733

 

913

 

(1)

 

26,645

Total Securities Held to Maturity

$

35,733

$

913

$

(13)

$

36,633

The amortized cost and fair value of securities at September 30, 2020 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

��

Held to Maturity

Available for Sale

(dollars in thousands)

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Due in one year or less

$

2,941

$

2,960

$

31,603

$

31,763

Due after one year through five years

 

14,630

 

15,403

 

80,130

 

82,863

Due after five years through ten years

 

5,204

 

5,467

 

88,038

 

93,204

Due after ten years

 

251

 

288

 

24,935

 

25,823

Total securities

$

23,026

$

24,118

$

224,706

$

233,653

Proceeds from sales and calls of securities were $4.6 million and $16.4 million during the three months ended September 30, 2020 and 2019, respectively, and $25.2 million and $57.5 million for the nine months ended September 30, 2020 and 2019, respectively. Gains and losses on securities transactions are determined using the specific identification method. Gross realized gains and losses on securities transactions during the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):

    

Three months ended

Nine months ended

    

September 30, 2020

    

September 30, 2019

    

September 30, 2020

    

September 30, 2019

Gross realized gains

$

79

$

87

$

375

$

504

Gross realized losses

 

(1)

 

(37)

 

(94)

 

(230)

Net securities gain

$

78

$

50

$

281

$

274

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 0 investments held that had OTTI losses for the three and nine months ended September 30, 2020 and 2019.

10

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2020 and December 31, 2019 were as follows (dollars in thousands):

September 30, 2020

Less than 12 Months

12 Months or More

Total

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale

U.S. Government agencies

$

2,912

$

(9)

$

8,765

$

(271)

$

11,677

$

(280)

State, county and municipal

 

4,830

 

(35)

 

301

 

(15)

 

5,131

 

(50)

Asset backed securities

 

12,536

 

(38)

 

4,388

 

(97)

 

16,924

 

(135)

Corporate bonds

 

7,727

 

(13)

 

 

 

7,727

 

(13)

Total

$

28,005

$

(95)

$

13,454

$

(383)

$

41,459

$

(478)

December 31, 2019

Less than 12 Months

12 Months or More

Total

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale

U.S. Government agencies

$

6,396

$

(102)

$

8,020

$

(117)

$

14,416

$

(219)

State, county and municipal

 

7,088

 

(32)

 

308

 

(10)

 

7,396

 

(42)

Mortgage backed securities

 

11,001

 

(40)

 

4,287

 

(73)

 

15,288

 

(113)

Asset backed securities

 

4,861

 

(74)

 

625

 

(8)

 

5,486

 

(82)

Corporate bonds

 

248

 

(3)

 

 

 

248

 

(3)

Total

$

29,594

$

(251)

$

13,240

$

(208)

$

42,834

$

(459)

Securities Held to Maturity

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government agencies

$

$

$

9,988

$

(12)

$

9,988

$

(12)

State, county and municipal

 

31

 

 

622

 

(1)

 

653

(1)

Total

$

31

$

$

10,610

$

(13)

$

10,641

$

(13)

The unrealized losses (impairments) in the investment portfolio at September 30, 2020 and December 31, 2019 are generally a result of market fluctuations of interest rates that occur daily. The unrealized losses are from 53 securities at September 30, 2020. Of those, 32 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. NaN investment grade asset-backed securities comprised of student loan pools, which are 97% U.S. government guaranteed, included in corporate obligations and 5 corporate bonds make up the remaining securities with unrealized losses at September 30, 2020. The Company considers the reason for impairment, length of impairment, and ability and intent 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 or reach maturity.

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 $49.8 million and $47.3 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $5.3 million and $5.8 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 30, 2020 and December 31, 2019, there were 0 securities purchased from a single issuer, other than U.S. Treasury securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

11

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at September 30, 2020 and December 31, 2019 were comprised of the following (dollars in thousands):

September 30, 2020

December 31, 2019

 

    

Amount

% of Loans

Amount

% of Loans

 

Mortgage loans on real estate:

Residential 1‑4 family

$

204,366

 

17.35

%  

$

223,538

 

21.12

%

Commercial

 

452,677

 

38.44

 

396,858

 

37.50

Construction and land development

 

159,766

 

13.57

 

146,566

 

13.85

Second mortgages

 

6,488

 

0.55

 

6,639

 

0.63

Multifamily

 

77,787

 

6.60

 

72,978

 

6.90

Agriculture

 

7,138

 

0.61

 

8,346

 

0.79

Total real estate loans

 

908,222

 

77.12

 

854,925

 

80.79

Commercial loans

 

257,362

 

21.85

 

191,183

 

18.06

Consumer installment loans

 

10,606

 

0.90

 

11,163

 

1.05

All other loans

 

1,519

 

0.13

 

1,052

 

0.10

Total loans

$

1,177,709

 

100.00

%  

$

1,058,323

 

100.00

%

The Company held $11.9 million and $12.7 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 September 30, 2020 and December 31, 2019, respectively. As these loans are 100% guaranteed by the USDA, 0 loan loss allowance is required. These loan balances included a purchase premium of $906,000 and $1.0 million at September 30, 2020 and December 31, 2019, respectively. The purchase premium is amortized 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.   Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.  

During the second and third quarters of 2020, the Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA).  These PPP loans totaled $85.1 million at September 30, 2020 and are included in commercial loans.  As these loans are 100% guaranteed by the SBA, 0 loan loss allowance is required. The majority of the PPP loans have a two year term; however, most are expected to be forgiven by the SBA as borrowers use the funds for qualified expenses. These loan balances included net fees of $2.0 million at September 30, 2020, which are being amortized 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. Any unamortized net fee remaining on loans forgiven or prepaid by the borrower is recorded as income.  

At September 30, 2020 and December 31, 2019, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with FASB ASC 310.

12

The following table summarizes information related to impaired loans as of September 30, 2020 and for the three and nine months ended September 30, 2020 (dollars in thousands):

Three months ended

Nine months ended

September 30, 2020

September 30, 2020

September 30, 2020

    

    

Unpaid

    

    

Recorded

Principal

Related

Average

Interest

Average

Interest

Investment (1)

Balance (2)

Allowance

Investment

Recognized

Investment

Recognized

With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$

631

$

789

$

$

888

$

7

$

1,105

$

22

Commercial

 

3,501

 

4,226

 

 

3,080

 

34

 

3,129

 

101

Construction and land development

164

Multifamily

 

 

 

 

 

 

616

 

Total real estate loans

 

4,132

 

5,015

 

 

3,968

 

41

 

5,014

 

123

Commercial loans

 

 

 

 

175

 

 

88

 

Subtotal impaired loans with no valuation allowance

 

4,132

 

5,015

 

 

4,143

 

41

 

5,102

 

123

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

2,190

 

2,621

 

615

 

2,156

 

13

 

1,923

 

37

Commercial

 

217

 

722

 

59

 

152

 

2

 

195

 

6

Construction and land development

 

572

 

675

 

153

 

847

 

 

798

 

Agriculture

 

51

 

51

 

14

 

51

 

 

26

 

Total real estate loans

 

3,030

 

4,069

 

841

 

3,206

 

15

 

2,942

 

43

Commercial loans

 

1,786

 

1,786

 

334

 

1,243

 

3

 

1,142

 

9

Consumer installment loans

 

19

 

19

 

5

 

15

 

 

12

 

Subtotal impaired loans with a valuation allowance

 

4,835

 

5,874

 

1,180

 

4,464

 

18

 

4,096

 

52

Total:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

2,821

 

3,410

 

615

 

3,044

 

20

 

3,028

 

59

Commercial

 

3,718

 

4,948

 

59

 

3,232

 

36

 

3,324

 

107

Construction and land development

 

572

 

675

 

153

 

847

 

 

962

 

Multifamily

 

 

 

 

 

 

616

 

Agriculture

 

51

 

51

 

14

 

51

 

 

26

 

Total real estate loans

 

7,162

 

9,084

 

841

 

7,174

 

56

 

7,956

 

166

Commercial loans

 

1,786

 

1,786

 

334

 

1,418

 

3

 

1,230

 

9

Consumer installment loans

 

19

 

19

 

5

 

15

 

 

12

 

Total impaired loans

$

8,967

$

10,889

$

1,180

$

8,607

$

59

$

9,198

$

175

(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 or valuation allowances.

13

The following table summarizes information related to impaired loans as of December 31, 2019 and for the three and nine months ended September 30, 2019 (dollars in thousands):

Three months ended

Nine months ended

December 31, 2019

September 30, 2019

September 30, 2019

    

    

Unpaid

    

    

Recorded

Principal

Related

Average

Interest

Average

Interest

Investment (1)

Balance (2)

Allowance

Investment

Recognized

Investment

Recognized

With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$

1,483

$

1,850

$

$

1,514

$

11

$

1,534

$

32

Commercial

 

3,226

 

3,966

 

 

3,308

 

35

 

3,372

 

103

Construction and land development

328

328

164

82

Multifamily

 

2,463

 

2,463

 

 

2,510

 

 

2,533

 

Total real estate loans

 

7,500

 

8,607

 

 

7,496

 

46

 

7,521

 

135

Subtotal impaired loans with no valuation allowance

 

7,500

 

8,607

 

 

7,496

 

46

 

7,521

 

135

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

1,498

 

1,808

 

380

 

1,862

 

12

 

1,965

 

36

Commercial

 

378

 

876

 

87

 

552

 

2

 

847

 

6

Construction and land development

 

48

 

147

 

11

 

2,084

 

 

3,210

 

Total real estate loans

 

1,924

 

2,831

 

478

 

4,498

 

14

 

6,022

 

42

Commercial loans

 

454

 

460

 

105

 

1,080

 

4

 

1,618

 

13

Consumer installment loans

 

7

 

7

 

1

 

6

 

 

5

 

Subtotal impaired loans with a valuation allowance

 

2,385

 

3,298

 

584

 

5,584

 

18

 

7,645

 

55

Total:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

2,981

 

3,658

 

380

 

3,376

 

23

 

3,499

 

68

Commercial

 

3,604

 

4,842

 

87

 

3,860

 

37

 

4,219

 

109

Construction and land development

 

376

 

475

 

11

 

2,248

 

 

3,292

 

Multifamily

 

2,463

 

2,463

 

 

2,510

 

 

2,533

 

Total real estate loans

 

9,424

 

11,438

 

478

 

11,994

 

60

 

13,543

 

177

Commercial loans

 

454

 

460

 

105

 

1,080

 

4

 

1,618

 

13

Consumer installment loans

 

7

 

7

 

1

 

6

 

 

5

 

Total impaired loans

$

9,885

$

11,905

$

584

$

13,080

$

64

$

15,166

$

190

(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 or valuation allowances.

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 September 30, 2020 and December 31, 2019, is set forth in the table below (dollars in thousands):

    

September 30, 2020

    

December 31, 2019

Nonaccruals

$

4,214

$

5,292

Trouble debt restructure and still accruing

 

4,753

 

4,593

Total impaired

$

8,967

$

9,885

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and nine months ended September 30, 2020 and 2019. For the three months ended September 30, 2020 and 2019, estimated interest income of $61,000 and $92,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, 2020 and 2019, estimated interest income of $152,000 and $284,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.  

14

The following tables present an age analysis of past due status of loans by category as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

    

3089 Days

    

90+ Days Past

    

Total Past

    

    

Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable

Mortgage loans on real estate:

 

  

 

  

  

 

  

 

  

 

  

Residential 1‑4 family

$

1,279

$

$

1,338

$

2,617

$

201,749

$

204,366

Commercial

 

 

 

764

 

764

 

451,913

 

452,677

Construction and land development

 

 

 

572

 

572

 

159,194

 

159,766

Second mortgages

 

227

 

 

 

227

 

6,261

 

6,488

Multifamily

 

 

 

 

 

77,787

 

77,787

Agriculture

 

 

 

51

 

51

 

7,087

 

7,138

Total real estate loans

 

1,506

 

 

2,725

 

4,231

 

903,991

 

908,222

Commercial loans

 

635

 

 

1,470

 

2,105

 

255,257

 

257,362

Consumer installment loans

 

20

 

 

19

 

39

 

10,567

 

10,606

All other loans

 

 

 

 

 

1,519

 

1,519

Total loans

$

2,161

$

$

4,214

$

6,375

$

1,171,334

$

1,177,709

December 31, 2019

    

3089 Days

    

90+ Days Past

    

Total Past

    

    

Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable

Mortgage loans on real estate:

 

  

 

  

  

 

  

 

  

 

  

Residential 1‑4 family

$

1,308

$

$

1,378

$

2,686

$

220,852

$

223,538

Commercial

 

552

 

 

1,006

 

1,558

 

395,300

 

396,858

Construction and land development

 

166

 

 

376

 

542

 

146,024

 

146,566

Second mortgages

 

229

 

 

 

229

 

6,410

 

6,639

Multifamily

 

 

 

2,463

 

2,463

 

70,515

 

72,978

Agriculture

 

 

 

 

 

8,346

 

8,346

Total real estate loans

 

2,255

 

 

5,223

 

7,478

 

847,447

 

854,925

Commercial loans

 

1,085

 

946

 

62

 

2,093

 

189,090

 

191,183

Consumer installment loans

 

41

 

 

7

 

48

 

11,115

 

11,163

All other loans

 

 

 

 

 

1,052

 

1,052

Total loans

$

3,381

$

946

$

5,292

$

9,619

$

1,048,704

$

1,058,323

Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, 2020 and 2019 is presented in the following tables (dollars in thousands):

    

Three Months Ended September 30, 2020

Provision

June 30, 2020

Allocation

Charge-offs

Recoveries

September 30, 2020

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

3,495

$

(954)

$

$

14

$

2,555

Commercial

 

4,612

 

(1,606)

 

 

5

 

3,011

Construction and land development

 

1,342

 

(254)

 

 

75

 

1,163

Second mortgages

 

45

 

(9)

 

 

2

 

38

Multifamily

 

499

 

28

 

 

 

527

Agriculture

 

44

 

7

 

 

 

51

Total real estate loans

 

10,037

 

(2,788)

 

 

96

 

7,345

Commercial loans

 

2,058

 

(288)

 

 

19

 

1,789

Consumer installment loans

 

110

 

31

 

(42)

 

17

 

116

All other loans

 

8

 

2

 

 

 

10

Unallocated

 

25

 

3,043

 

 

 

3,068

Total loans

$

12,238

$

$

(42)

$

132

$

12,328

15

Three Months Ended September 30, 2019

Provision

    

June 30, 2019

    

Allocation

    

Charge-offs

    

Recoveries

    

September 30, 2019

Mortgage loans on real estate:

  

  

  

  

  

Residential 1‑4 family

$

2,894

$

(35)

$

(144)

$

26

$

2,741

Commercial

 

2,026

 

1

 

 

7

 

2,034

Construction and land development

 

1,399

 

(587)

 

(200)

 

18

 

630

Second mortgages

 

81

 

(7)

 

 

2

 

76

Multifamily

 

192

 

17

 

 

41

 

250

Agriculture

 

32

 

15

 

 

 

47

Total real estate loans

 

6,624

 

(596)

 

(344)

 

94

 

5,778

Commercial loans

 

1,999

 

(229)

 

(98)

 

3

 

1,675

Consumer installment loans

 

185

 

32

 

(134)

 

53

 

136

All other loans

 

8

 

 

 

 

8

Unallocated

 

3

 

793

 

 

 

796

Total loans

$

8,819

$

$

(576)

$

150

$

8,393

    

Nine Months Ended September 30, 2020

Provision

December 31, 2019

Allocation

Charge-offs

Recoveries

September 30, 2020

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

2,685

$

(173)

$

$

43

$

2,555

Commercial

 

2,196

 

731

 

 

84

 

3,011

Construction and land development

 

1,044

 

(40)

 

 

159

 

1,163

Second mortgages

 

79

 

(45)

 

 

4

 

38

Multifamily

 

248

 

279

 

 

 

527

Agriculture

 

38

 

13

 

 

 

51

Total real estate loans

 

6,290

 

765

 

 

290

 

7,345

Commercial loans

 

1,980

 

331

 

(608)

 

86

 

1,789

Consumer installment loans

 

114

 

71

 

(146)

 

77

 

116

All other loans

 

7

 

3

 

 

 

10

Unallocated

 

38

 

3,030

 

 

 

3,068

Total loans

$

8,429

$

4,200

$

(754)

$

453

$

12,328

Nine Months Ended September 30, 2019

Provision

    

December 31, 2018

    

Allocation

    

Charge-offs

    

Recoveries

    

September 30, 2019

Mortgage loans on real estate:

  

  

  

  

  

Residential 1‑4 family

$

2,281

$

394

$

(178)

$

244

$

2,741

Commercial

 

1,810

 

430

 

(277)

 

71

 

2,034

Construction and land development

 

1,161

 

(390)

 

(212)

 

71

 

630

Second mortgages

 

20

 

51

 

 

5

 

76

Multifamily

 

371

 

(162)

 

 

41

 

250

Agriculture

 

17

 

30

 

 

 

47

Total real estate loans

 

5,660

 

353

 

(667)

 

432

 

5,778

Commercial loans

 

1,894

 

129

 

(355)

 

7

 

1,675

Consumer installment loans

 

152

 

116

 

(234)

 

102

 

136

All other loans

 

12

 

(4)

 

 

 

8

Unallocated

 

1,265

 

(469)

 

 

 

796

Total loans

$

8,983

$

125

$

(1,256)

$

541

$

8,393

16

The increase in provision expense reflects the significant increase in commercial real estate and commercial loans classified as special mention due to the inherent economic impact COVID-19 may have on these borrowers.  The allowance for loan losses could be further impacted by COVID-19; however, the amount of that impact is not currently estimable.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

Allowance for Loan Losses

Recorded Investment in Loans

    

Individually

    

Collectively

    

    

Individually

    

Collectively

    

Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

615

$

1,940

$

2,555

$

2,821

$

201,545

$

204,366

Commercial

 

59

 

2,952

 

3,011

 

3,718

 

448,959

 

452,677

Construction and land development

 

153

 

1,010

 

1,163

 

572

 

159,194

 

159,766

Second mortgages

 

 

38

 

38

 

 

6,488

 

6,488

Multifamily

 

 

527

 

527

 

 

77,787

 

77,787

Agriculture

 

14

 

37

 

51

 

51

 

7,087

 

7,138

Total real estate loans

 

841

 

6,504

 

7,345

 

7,162

 

901,060

 

908,222

Commercial loans

 

334

 

1,455

 

1,789

 

1,786

 

255,576

 

257,362

Consumer installment loans

 

5

 

111

 

116

 

19

 

10,587

 

10,606

All other loans

 

 

10

 

10

 

 

1,519

 

1,519

Unallocated

 

 

3,068

 

3,068

 

 

 

Total loans

$

1,180

$

11,148

$

12,328

$

8,967

$

1,168,742

$

1,177,709

December 31, 2019

Allowance for Loan Losses

Recorded Investment in Loans

    

Individually

    

Collectively

    

    

Individually

    

Collectively

    

Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

380

$

2,305

$

2,685

$

2,981

$

220,557

$

223,538

Commercial

 

87

 

2,109

 

2,196

 

3,604

 

393,254

 

396,858

Construction and land development

 

11

 

1,033

 

1,044

 

376

 

146,190

 

146,566

Second mortgages

 

 

79

 

79

 

 

6,639

 

6,639

Multifamily

 

 

248

 

248

 

2,463

 

70,515

 

72,978

Agriculture

 

 

38

 

38

 

 

8,346

 

8,346

Total real estate loans

 

478

 

5,812

 

6,290

 

9,424

 

845,501

 

854,925

Commercial loans

 

105

 

1,875

 

1,980

 

454

 

190,729

 

191,183

Consumer installment loans

 

1

 

113

 

114

 

7

 

11,156

 

11,163

All other loans

 

 

7

 

7

 

 

1,052

 

1,052

Unallocated

 

 

38

 

38

 

 

 

Total loans

$

584

$

7,845

$

8,429

$

9,885

$

1,048,438

$

1,058,323

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 $11.9 million and $12.7 million at September 30, 2020 and December 31, 2019, respectively, and PPP loans 100% guaranteed by the SBA of $85.1 million at September 30, 2020.

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.

17

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.

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 possibility of loss is extremely high.

The following tables present the composition of loans by credit quality indicator at September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

Residential 1‑4 family

$

189,923

$

13,104

$

1,339

$

$

204,366

Commercial

 

357,037

 

93,500

 

2,140

 

 

452,677

Construction and land development

 

158,447

 

747

 

572

 

 

159,766

Second mortgages

 

5,286

 

1,202

 

 

 

6,488

Multifamily

 

70,964

 

6,823

 

 

 

77,787

Agriculture

 

6,713

 

374

 

51

 

 

7,138

Total real estate loans

 

788,370

 

115,750

 

4,102

 

 

908,222

Commercial loans

 

222,378

 

27,653

 

7,331

 

 

257,362

Consumer installment loans

 

10,537

 

50

 

19

 

 

10,606

All other loans

 

1,503

 

16

 

 

 

1,519

Total loans

$

1,022,788

$

143,469

$

11,452

$

$

1,177,709

December 31, 2019

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

219,210

$

2,964

$

1,364

$

$

223,538

Commercial

 

391,251

 

3,188

 

2,419

 

 

396,858

Construction and land development

 

145,782

 

408

 

376

 

 

146,566

Second mortgages

 

6,096

 

543

 

 

 

6,639

Multifamily

 

70,515

 

 

2,463

 

 

72,978

Agriculture

 

8,098

 

248

 

 

 

8,346

Total real estate loans

 

840,952

 

7,351

 

6,622

 

 

854,925

Commercial loans

 

185,123

 

2,770

 

3,290

 

 

191,183

Consumer installment loans

 

11,140

 

16

 

7

 

 

11,163

All other loans

 

1,052

 

 

 

 

1,052

Total loans

$

1,038,267

$

10,137

$

9,919

$

$

1,058,323

In accordance with FASB Accounting Standards Update (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. The Company had 19 and 25 loans that met the definition of a TDR at September 30, 2020 and 2019, respectively.

The Company had 0 loan modifications considered to be TDRs during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company modified 1 commercial real estate loan that was considered to be a TDR. The Company granted the borrower six months interest only payment relief and no other changes were made to the loan structure. The loan is 100% guaranteed by the USDA and had a pre- and post-modification balance of $438,000. The Company had 0 loan modifications considered to be TDRs during the three and nine months ended September 30, 2019.

18

 

A loan is considered to be in default if it is 90 days or more past due. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three and nine months ended September 30, 2020. There were 0 TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended September 30, 2019. During the nine months ended September 30, 2019, 1 loan defaulted that had been restructured during the previous 12 months prior to the default. This multifamily real estate loan had a recorded investment of $2.6 million.

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 September 30, 2020, the Company had 1-4 family mortgages in the amount of $92.4 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $76.7 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (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 “PCI 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.

As of September 30, 2020 and December 31, 2019, the outstanding contractual balance of the PCI loans was $46.6 million and $53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in

thousands):

September 30, 2020

December 31, 2019

 

    

    

% of PCI

    

    

% of PCI

 

Amount

Loans

Amount

Loans

 

Mortgage loans on real estate:

Residential 1‑4 family

$

24,664

 

90.86

%  

$

29,465

 

90.58

%

Commercial

 

457

 

1.68

 

490

 

1.51

Construction and land development

 

846

 

3.12

 

1,172

 

3.60

Second mortgages

 

963

 

3.55

 

1,169

 

3.59

Multifamily

 

216

 

0.79

 

232

 

0.72

Total real estate loans

 

27,146

 

100.00

 

32,528

 

100.00

Total PCI loans

$

27,146

 

100.00

%  

$

32,528

 

100.00

%

There was 0 activity in the allowance for loan losses on PCI loans for the three and nine months ended September 30, 2020 and 2019.

19

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

December 31, 2019

    

Allowance

    

Recorded

    

    

Recorded

for loan

investment in

Allowance for

investment in

losses

loans

loan losses

loans

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

156

$

24,664

$

156

$

29,465

Commercial

 

 

457

 

 

490

Construction and land development

 

 

846

 

 

1,172

Second mortgages

 

 

963

 

 

1,169

Multifamily

 

 

216

 

 

232

Total real estate loans

 

156

 

27,146

 

156

 

32,528

Total PCI loans

$

156

$

27,146

$

156

$

32,528

The change in the accretable yield balance for the nine months ended September 30, 2020 and the year ended December 31, 2019, is as follows (dollars in thousands):

    

    

Balance, January 1, 2019

$

38,107

Accretion

 

(6,010)

Reclassification from nonaccretable difference

 

1,369

Balance, December 31, 2019

$

33,466

Accretion

 

(3,110)

Reclassification to nonaccretable difference

 

(101)

Balance, September 30, 2020

$

30,255

The PCI loans were not classified as nonperforming assets as of September 30, 2020, 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.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned at September 30, 2020 and December 31, 2019 (dollars in thousands):

    

September 30, 2020

    

December 31, 2019

Residential 1‑4 family

$

21

$

21

Construction and land development

 

4,395

 

4,506

Total other real estate owned

$

4,416

$

4,527

At September 30, 2020, the Company had $429,000 in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

20

Note 6. Deposits

The following table provides interest bearing deposit information, by type, at September 30, 2020 and December 31, 2019 (dollars in thousands):

    

September 30, 2020

    

December 31, 2019

Interest bearing checking

$

201,121

$

NOW

170,532

MMDA

 

158,569

 

120,841

Savings

 

118,007

 

96,570

Time deposits less than or equal to $250,000

 

468,549

 

477,461

Time deposits over $250,000

 

141,417

 

119,460

Total interest bearing deposits

$

1,087,663

$

984,864

Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

Note 7. Accumulated Other Comprehensive Income

The following tables present activity net of tax in accumulated other comprehensive income (AOCI) for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three months ended September 30, 2020

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$

5,688

$

(886)

$

(572)

$

4,230

Other comprehensive income (loss) before reclassifications

 

1,353

 

 

37

 

1,390

Amounts reclassified from AOCI

 

(61)

 

 

 

(61)

Net current period other comprehensive income (loss)

 

1,292

 

 

37

 

1,329

Ending balance

$

6,980

$

(886)

$

(535)

$

5,559

Three months ended September 30, 2019

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$

2,798

$

(857)

$

9

$

1,950

Other comprehensive income (loss) before reclassifications

 

948

 

 

(122)

 

826

Amounts reclassified from AOCI

 

(39)

 

 

 

(39)

Net current period other comprehensive income (loss)

 

909

 

 

(122)

 

787

Ending balance

$

3,707

$

(857)

$

(113)

$

2,737

21

Nine months ended September 30, 2020

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$

2,887

$

(886)

$

(36)

$

1,965

Other comprehensive income (loss) before reclassifications

 

4,312

 

 

(499)

 

3,813

Amounts reclassified from AOCI

 

(219)

 

 

 

(219)

Net current period other comprehensive income (loss)

 

4,093

 

 

(499)

 

3,594

Ending balance

$

6,980

$

(886)

$

(535)

$

5,559

Nine months ended September 30, 2019

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$

(618)

$

(857)

$

196

$

(1,279)

Other comprehensive income (loss) before reclassifications

 

4,539

 

 

(309)

 

4,230

Amounts reclassified from AOCI

 

(214)

 

 

 

(214)

Net current period other comprehensive income (loss)

 

4,325

 

 

(309)

 

4,016

Ending balance

$

3,707

$

(857)

$

(113)

$

2,737

The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Affected Line Item in the Unaudited Consolidated

Details about AOCI Components

Amount Reclassified from AOCI

Statement of Income

Three months ended

    

September 30, 2020

    

September 30, 2019

    

  

Securities available for sale:

 

  

 

  

 

  

Unrealized gains on securities available for sale

$

(78)

$

(50)

 

Gain on securities transactions, net

Related tax expense

 

17

 

11

 

Income tax expense

$

(61)

$

(39)

 

Net of tax

Affected Line Item in the Unaudited Consolidated

Details about AOCI Components

Amount Reclassified from AOCI

Statement of Income

Nine months ended

    

September 30, 2020

    

September 30, 2019

    

  

Securities available for sale:

 

  

 

  

 

  

Unrealized gains on securities available for sale

$

(281)

$

(274)

 

Gain on securities transactions, net

Related tax expense

 

62

 

60

 

Income tax expense

$

(219)

$

(214)

 

Net of tax

Note 8. 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 (an exit price) 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

22

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 1Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2Valuation 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 3Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Companys 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 September 30, 2020.

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 the cash flow hedge 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):

September 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

12,500

$

12,500

$

$

U.S. Government agencies

 

19,745

 

 

19,745

 

State, county and municipal

 

116,534

 

1,329

 

115,205

 

Mortgage backed securities

 

29,951

 

 

29,951

 

Asset backed securities

 

28,986

 

550

 

28,436

 

Corporate bonds

 

25,937

 

750

 

25,187

 

Total investment securities available for sale

 

233,653

 

15,129

 

218,524

 

Total assets at fair value

$

233,653

$

15,129

$

218,524

$

Cash flow hedge liability

$

683

 

$

683

 

Total liabilities at fair value

$

683

$

$

683

$

23

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

U.S. Government agencies

$

21,936

$

$

21,936

$

State, county and municipal

 

98,592

 

10,072

 

88,520

 

Mortgage backed securities

 

48,740

 

1,181

 

47,559

 

Asset backed securities

 

11,604

 

 

11,604

 

Corporate bonds

 

6,097

 

 

6,097

 

Total investment securities available for sale

 

186,969

 

11,253

 

175,716

 

Total assets at fair value

$

186,969

$

11,253

$

175,716

$

Cash flow hedge liability

44

 

$

44

 

Total liabilities at fair value

$

44

$

$

44

$

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 (Level 1). 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 (Level 2).

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 reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 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.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

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 tables present assets measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

$

3,241

$

$

$

3,241

Loans held for sale

1,151

 

 

1,151

 

Bank premises and equipment held for sale

 

1,589

 

 

 

1,589

Other real estate owned

 

4,416

 

 

 

4,416

Total assets at fair value

$

10,397

$

$

1,151

$

9,246

Total liabilities at fair value

$

$

$

$

24

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

$

3,020

$

$

$

3,020

Loans held for sale

501

501

 

Bank premises and equipment held for sale

1,589

 

1,589

Other real estate owned

 

4,527

 

 

 

4,527

Total assets at fair value

$

9,637

$

$

501

$

9,136

Total liabilities at fair value

$

$

$

$

Impaired loans

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 September 30, 2020 and December 31, 2019, 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 18 months old and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. The Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the collateral.  Therefore, the Company records impaired loans as nonrecurring Level 3.  For the period ended September 30, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, related to impaired loans were 16.4% and 12.8%, respectively.

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 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.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value or fair value less estimated disposal costs. The Company may incur additional write-downs of OREO assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Company records OREO as a nonrecurring fair value measurement classified as Level 3.

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

25

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. Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

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. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

September 30, 2020

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:

Securities held to maturity

$

23,026

$

24,118

$

$

24,118

$

Loans, net of allowance

 

1,165,381

 

1,174,649

 

 

 

1,174,649

PCI loans, net of allowance

 

26,990

 

35,188

 

 

 

35,188

Financial liabilities:

 

 

  

 

  

 

 

  

Interest bearing deposits

 

1,087,663

 

1,091,539

 

 

1,091,539

 

Borrowings

 

72,124

 

73,137

 

 

73,137

 

December 31, 2019

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:

Securities held to maturity

$

35,733

$

36,633

$

$

36,633

$

Loans, net of allowance

 

1,049,894

 

1,041,671

 

 

 

1,041,671

PCI loans, net of allowance

 

32,372

 

38,982

 

 

 

38,982

Financial liabilities:

 

 

  

 

  

 

 

  

Interest bearing deposits

 

984,864

 

985,853

 

 

985,853

 

Borrowings

 

72,624

 

72,457

 

 

72,457

 

26

Note 9. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three and nine months ended September 30, 2020 and 2019 (dollars and shares in thousands, except per share data):

    

    

Weighted Average

    

Net Income

Shares

Per

(Numerator)

(Denominator)

Share Amount

For the three months September 30, 2020

Basic EPS

$

4,516

 

22,312

$

0.20

Effect of dilutive stock awards

 

 

191

 

Diluted EPS

$

4,516

 

22,503

$

0.20

For the three months ended September 30, 2019

 

  

 

  

 

  

Basic EPS

$

4,613

 

22,303

$

0.21

Effect of dilutive stock awards

 

 

258

 

(0.01)

Diluted EPS

$

4,613

 

22,561

$

0.20

For the nine months ended September 30, 2020

Basic EPS

$

10,091

 

22,339

$

0.45

Effect of dilutive stock awards

 

 

195

 

Diluted EPS

$

10,091

 

22,534

$

0.45

For the nine months ended September 30, 2019

 

  

 

  

 

  

Basic EPS

$

11,660

 

22,224

$

0.52

Effect of dilutive stock awards

 

 

251

 

Diluted EPS

$

11,660

 

22,475

$

0.52

Antidilutive shares issuable under awards or options of 1.4 million and 253,000 were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2020 and 2019, respectively.

Note 10. Employee Benefit Plan

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex 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 froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

 

Three months ended

 

Nine months ended

    

September 30, 2020

    

September 30, 2019

    

September 30, 2020

    

September 30, 2019

Interest cost

$

33

$

41

$

99

$

122

Expected return on plan assets

 

(54)

 

(53)

 

(161)

 

(159)

Amortization of prior service cost

 

1

 

1

 

3

 

3

Recognized net loss due to settlement

 

 

40

 

 

93

Recognized net actuarial  loss

 

12

 

12

 

36

 

36

Net periodic (income) expense

$

(8)

$

41

$

(23)

$

95

27

Note 11. Cash Flow Hedge

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had interest rate swaps designated as cash flow hedges with total notional amounts of $20 million and $10 million at September 30, 2020 and December 31, 2019, respectively.  The swaps were entered into with a counterparty that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant. The Company had $770,000 and $180,000 of cash pledged as collateral at September 30, 2020 and December 31, 2019, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815, Derivatives and Hedging, the Company has designated the swaps as cash flow hedges, with the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be highly effective for the three and nine month periods ended September 30, 2020 and 2019. The Company recorded a fair value liability of $683,000 and $44,000 in other liabilities at September 30, 2020 and December 31, 2019, respectively. The net losses were recorded as a component of other comprehensive income net of associated tax effects.

Note 12. Revenue Recognition

The Company recognizes income in accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. 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 this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. 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

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers, related costs are netted against the fee income. These costs were included in other operating expenses prior to the adoption of Topic 606.

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month.

28

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.

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

    

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$

315

$

486

$

1,042

$

1,341

Interchange and ATM fees

 

298

 

271

 

775

 

732

Brokerage fees and commissions

 

53

 

67

 

256

 

262

Noninterest income (in-scope of Topic 606)

 

666

 

824

 

2,073

 

2,335

Noninterest income (out-of-scope of Topic 606)

 

806

 

687

 

2,350

 

1,641

Total noninterest income

$

1,472

$

1,511

$

4,423

$

3,976

Note 13. Leases

The Company accounts for leases in accordance with FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises.  The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability.  The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed.  None of the Company’s current leases contain variable lease payment terms.  The Company accounts for associated non-lease components separately.

The following table presents operating lease liabilities as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

December 31, 2019

 

  

  

Gross lease liability

$

8,354

$

9,278

Less: imputed interest

 

(2,327)

 

(2,541)

Present value of lease liability

$

6,027

$

6,737

The weighted average remaining lease term and weighted average discount rate for operating leases at September 30, 2020 was 12.2 years and 4.74%, respectively. The weighted average remaining lease term and weighted average discount rate for operating leases at December 31, 2019 was 12.0 years and 4.63%, respectively.

Maturities of the gross operating lease liability at September 30, 2020 are as follows (dollars in thousands):

2020

    

$

307

2021

 

1,191

2022

 

600

2023

 

630

2024

 

573

Thereafter

 

5,053

Total of future payments

$

8,354

29

Operating lease costs and sublease rental income for the three months ended September 30, 2020 were $317,000 and $27,000, respectively.  Operating lease costs and sublease rental income for the three months ended September 30, 2019 were $318,000 and $63,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2020 were $952,000 and $82,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2019 were $1.1 million and $129,000, respectively.

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

The following discussion and analysis of the financial condition at September 30, 2020 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, 2020 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, 2019.

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 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland.  The Bank also operates two loan production offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, 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 cash management services.

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 mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through branch growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.

The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing fees, professional fees, transactions involving bank-owned property, 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;

30

assumptions that underlie the Company’s allowance for loan losses;
general economic and market conditions, either nationally or in the Company’s market areas;
unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them
the interest rate environment;
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 purchased credit impaired loans;
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, 2019 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.

31

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.

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 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 uncollectability 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 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. The evaluation also considers the following risk characteristics of each loan portfolio:

Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.
Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.
Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.
Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

32

Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.
Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).
Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.
Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.
All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

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 Company’s allowance for loan losses, and may require the Company 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, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or discounted cash flows 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. The unallocated component covers uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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, 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 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 evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

33

Accounting for Certain Loans Acquired in a Transfer

Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 the allowance for loan losses.

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805, Business Combinations, were 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 PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

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 recorded. 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.

RESULTS OF OPERATIONS

Overview

Coming off a strong end to the 2019 year, the Company began the year with good momentum but was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis.  Specific events that impacted the Company’s financial results for the first nine months of 2020, and will impact future financial results, include government mandated business closures and stay-at-home orders, which have transformed into some of the highest unemployment rates seen in the Company’s markets.  In addition, unprecedented government stimulus programs and the uncertainties regarding how long the mandates will last have contributed to the unpredictability of the financial impacts that the Company may experience.  The Company is focused on assessing the risks in its loan portfolio and working with our customers to minimize future losses.  See below for additional discussion regarding trends and the potential effects of COVID-19.  

Net income in the third quarter of 2020 decreased $97,000 when compared to the same period in 2019.  Net income was $4.5 million in the third quarter of 2020, with earnings per share of $0.20 basic and fully diluted.  Net income for the third quarter of 2019 was $4.6 million, with earnings per share of $0.21 basic and $0.20 fully diluted. The decrease in net income was driven by a decrease of $1.9 million in interest income, primarily from a $1.1 million payoff within a loan pool in the PCI portfolio, with no carrying value, and thus resulted in the entire payment being recognized as interest

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income during the nine months ended September 30, 2019. Additionally, noninterest income declined a nominal $39,000 year over year and income tax expense increased by $56,000. Offsetting these decreases to net income were a decrease of $1.2 million in interest expense and a decrease of $704,000 in noninterest expenses. The decrease in noninterest expenses was mainly the result of a nonperforming loan of $4.0 million that was migrated to other real estate owned (OREO) in the third quarter of 2019. As a part of this transaction, the Bank paid delinquent real estate taxes in the amount of $624,000 on this property.

Net income for the first nine months of 2020 was $10.1 million, or $0.45 per common share, basic and fully diluted. This is a decrease of $1.6 million, or 13.5%, when compared with net income of $11.7 million, or $0.52 basic and diluted earnings per share, for the first nine months of 2019. The decrease was primarily the result of the provision for loan losses of $4.2 million for the first nine months of 2020 compared with $125,000 for the same period in 2019. The level of provision in 2020 was recorded to reflect the business and market disruptions arising from the COVID-19 pandemic. Also declining on a year-over-year nine month basis was net interest income by $233,000. Offsetting these decreases to net income were a decrease of $2.1 million in noninterest expenses, primarily from a reduction in salaries and employee benefits of $1.1 million, due primarily to capitalized internal loan origination costs related to PPP loan volume, an increase of $447,000 in noninterest income, which was driven by an increase of $484,000 in mortgage loan income, and a decrease of $224,000 in income tax expense.

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.”

Net interest income decreased $706,000, or 5.3%, from the third quarter of 2019 to the third quarter of 2020. Net interest income was $12.7 million in the third quarter of 2020 compared with $13.4 million for the same period in 2019.  Interest and dividend income decreased $1.9 million, or 10.9%, over this time period. In the third quarter of 2019, a $1.1 million payoff was received within a loan pool in the PCI portfolio, with no carrying value, which resulted in the entire payment being recognized as interest income. Interest and fees on loans decreased by $427,000, or 3.2%, driven by a decrease in rate. Interest and fees on PCI loans, affected by the $1.1 million payoff previously noted, decreased by $1.4 million and was $962,000 in the third quarter of 2020. Securities income decreased by $138,000, and interest on deposits in other banks increased by $34,000.

The average balance of the loan portfolio, excluding PCI loans, increased by $131.9 million, year over year and averaged $1.169 billion for the third quarter of 2020. The PCI portfolio declined $6.5 million during the year-over-year comparison period. The average balance of total earning assets increased $184.7 million, or 13.9%, from the third quarter of 2019 to the third quarter of 2020. The yield on earning assets decreased from 5.23% in the third quarter of 2019, boosted by the $1.1 million PCI payment, to 4.09% in the third quarter of 2020. The yield on earning assets was the culmination of decreases in the yield on all loans, from 5.74% in the third quarter of 2019 to 4.55% in the third quarter of 2020, in the tax-equivalent yield on securities, from 3.17% in the third quarter of 2019 to 2.89% in the third quarter of 2020, and in the yield on interest bearing bank balances, from 2.58% to 0.68% year over year. Income on interest bearing bank balances   increased $34,000 as a result of an increase of $57.1 million in the average balance in the third quarter of 2020 as compared with the same period one year ago.  

Interest expense decreased $1.2 million, or 29.8%, when comparing the third quarter of 2020 and the third quarter of 2019. Interest expense on deposits decreased $1.1 million, or 29.3%, as the cost declined from 1.45% in the third quarter of 2019 to 0.96% for the same period in 2020.  The average balance of interest bearing deposits increased $70.0 million, or 6.9%. This growth was from non-maturity deposit sources. First, there was an increase of $45.8 million, or 29.5%, in the average balance of interest bearing ch