Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2013

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)

 

 

 

Delaware   20-2652949

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4235 Innslake Drive, Suite 200

Glen Allen, Virginia

  23060
(Address of principal executive offices)   (Zip Code)

(804) 934-9999

(Registrant’s telephone number, including area code)

n/a

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

At March 31, 2013, there were 21,682,962 shares of the Company’s common stock outstanding.

 

 

 


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

March 31, 2013

 

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Statements of Financial Condition

     3   

Unaudited Consolidated Statements of Operations

     4   

Unaudited Consolidated Statements of Comprehensive Income

     5   

Unaudited Consolidated Statements of Stockholders’ Equity

     6   

Unaudited Consolidated Statements of Cash Flows

     7   

Notes to Unaudited Consolidated Financial Statements

     8   

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

     34   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     47   

Item 4. Controls and Procedures

     48   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     50   

Item 1A. Risk Factors

     50   

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

     50   

Item 3. Defaults upon Senior Securities

     50   

Item 4. Mine Safety Disclosures

     50   

Item 5. Other Information

     50   

Item 6. Exhibits

     50   

SIGNATURES

     51   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2013 AND DECEMBER 31, 2012

(dollars in thousands)

 

     March 31, 2013     December 31, 2012  
     (Unaudited)     (Audited)  

ASSETS

  

Cash and due from banks

   $ 10,477      $ 12,502   

Interest bearing bank deposits

     13,591        11,635   
  

 

 

   

 

 

 

Total cash and cash equivalents

     24,068        24,137   

Securities available for sale, at fair value

     274,090        309,078   

Securities held to maturity, at cost (fair value of $41,322 and $45,228, respectively)

     38,677        42,283   

Equity securities, restricted, at cost

     7,198        7,405   
  

 

 

   

 

 

 

Total securities

     319,965        358,766   

Loans held for sale

     1,145        1,266   

Loans not covered by FDIC shared loss agreements

     579,807        575,482   

Loans covered by FDIC shared loss agreements

     82,364        84,637   
  

 

 

   

 

 

 

Total loans

     662,171        660,119   

Allowance for loan losses (non-covered loans of $12,258 and $12,920, respectively; covered loans of $484 and $484, respectively)

     (12,742     (13,404
  

 

 

   

 

 

 

Net loans

     649,429        646,715   

FDIC indemnification asset

     31,517        33,837   

Bank premises and equipment, net

     33,237        33,638   

Other real estate owned, covered by FDIC shared loss agreements

     2,483        3,370   

Other real estate owned, non-covered

     9,712        10,793   

Bank owned life insurance

     20,274        15,146   

FDIC receivable under shared loss agreements

     750        895   

Core deposit intangibles, net

     9,731        10,297   

Other assets

     14,790        14,428   
  

 

 

   

 

 

 

Total assets

   $ 1,117,101      $ 1,153,288   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest bearing

   $ 81,330      $ 77,978   

Interest bearing

     860,728        896,340   
  

 

 

   

 

 

 

Total deposits

     942,058        974,318   

Federal funds purchased

     992        5,412   

Federal Home Loan Bank advances

     49,654        49,828   

Trust preferred capital notes

     4,124        4,124   

Other liabilities

     3,938        4,289   
  

 

 

   

 

 

 

Total liabilities

     1,000,766        1,037,971   
  

 

 

   

 

 

 

Commitment and Contingencies (Note 12)

    

STOCKHOLDERS’ EQUITY

    

Preferred stock (5,000,000 shares authorized, $0.01 par value; 17,680 shares issued and outstanding)

     17,680        17,680   

Warrants on preferred stock

     1,037        1,037   

Discount on preferred stock

     (176     (234

Common stock (200,000,000 shares authorized, $0.01 par value; 21,682,962 and 21,670,212 shares issued and outstanding, respectively)

     218        217   

Additional paid in capital

     144,463        144,398   

Retained deficit

     (49,564     (50,609

Accumulated other comprehensive income

     2,677        2,828   
  

 

 

   

 

 

 

Total stockholders’ equity

     116,335        115,317   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,117,101      $ 1,153,288   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

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

 

     Three months ended  
     March 31, 2013     March 31, 2012  

Interest and dividend income

    

Interest and fees on non-covered loans

   $ 7,511      $ 7,687   

Interest and fees on FDIC covered loans

     2,659        3,914   

Interest on federal funds sold

     2        1   

Interest on deposits in other banks

     8        12   

Interest and dividends on securities

    

Taxable

     1,838        2,077   

Nontaxable

     148        118   
  

 

 

   

 

 

 

Total interest and dividend income

     12,166        13,809   

Interest expense

    

Interest on deposits

     1,701        2,353   

Interest on federal funds purchased

     1        —     

Interest on other borrowed funds

     192        359   
  

 

 

   

 

 

 

Total interest expense

     1,894        2,712   
  

 

 

   

 

 

 

Net interest income

     10,272        11,097   

Provision for loan losses

     —          250   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     10,272        10,847   
  

 

 

   

 

 

 

Noninterest income

    

Service charges on deposit accounts

     663        617   

Gain (loss) on securities transactions, net

     278        (116

Loss on sale of other real estate, net

     (630     (177

Other

     419        501   
  

 

 

   

 

 

 

Total noninterest income

     730        825   
  

 

 

   

 

 

 

Noninterest expense

    

Salaries and employee benefits

     3,993        4,238   

Occupancy expenses

     663        631   

Equipment expenses

     267        295   

Legal fees

     13        24   

Professional fees

     50        85   

FDIC assessment

     167        584   

Data processing fees

     537        517   

FDIC indemnification asset amortization

     1,501        1,882   

Amortization of intangibles

     565        565   

Other operating expenses

     1,359        1,471   
  

 

 

   

 

 

 

Total noninterest expense

     9,115        10,292   
  

 

 

   

 

 

 

Income before income taxes

     1,887        1,380   

Income tax expense

     563        390   
  

 

 

   

 

 

 

Net income

     1,324        990   

Dividends paid on preferred stock

     221        221   

Accretion of discount on preferred stock

     58        55   
  

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,045      $ 714   
  

 

 

   

 

 

 

Net income per share — basic

   $ 0.05      $ 0.03   
  

 

 

   

 

 

 

Net income per share — diluted

   $ 0.05      $ 0.03   
  

 

 

   

 

 

 

Weighted average number of shares outstanding

    

basic

     21,682        21,631   

diluted

     21,839        21,642   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars in thousands)

 

     Three months ended  
     March 31, 2013     March 31, 2012  

Net income

   $ 1,324      $ 990   
  

 

 

   

 

 

 

Other comprehensive income:

    

Change in unrealized gain (loss) in investment securities

     49        (938

Tax related to unrealized (gain) loss in investment securities

     (17     319   

Reclassification adjustment for realized (gain) loss in securities sold

     (278     116   

Tax related to realized gain (loss) in securities sold

     95        (40
  

 

 

   

 

 

 

Total other comprehensive loss

     (151     (543
  

 

 

   

 

 

 

Total comprehensive income

   $ 1,173      $ 447   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars and shares in thousands)

 

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

Balance January 1, 2012

  $ 17,680      $ 1,037      $ (454     21,628      $ 216      $ 144,243      $ (53,761   $ 2,219      $ 111,180   

Amortization of preferred stock warrants

    —          —          55        —          —          —          (55     —          —     

Dividends paid on preferred stock

                (221       (221

Issuance of stock options

    —          —          —          —          —          16        —          —          16   

Net income

    —          —          —          —          —          —          990        —          990   

Other comprehensive loss

    —          —          —          —          —          —          —          (543     (543
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

  $ 17,680      $ 1,037      $ (399     21,628      $ 216      $ 144,259      $ (53,047   $ 1,676      $ 111,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2013

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

Amortization of preferred stock warrants

    —          —          58        —         —          —         (58     —          —     

Issuance of common stock

    —          —          —          13        1        35        —          —          36   

Dividends paid on preferred stock

    —          —          —          —          —          —          (221     —          (221

Issuance of stock options

    —          —          —          —          —          30        —          —          30   

Net income

    —          —          —          —          —          —          1,324        —          1,324   

Other comprehensive loss

    —          —          —          —          —          —          —          (151     (151
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 31, 2013

  $ 17,680      $ 1,037      $ (176     21,683      $ 218      $ 144,463      $ (49,564   $ 2,677      $ 116,335   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(dollars in thousands)

 

     March 31, 2013     March 31, 2012  

Operating activities:

    

Net income

   $ 1,324      $ 990   

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

    

Depreciation and intangibles amortization

     973        1,009   

Issuance of common stock and stock options

     66        16   

Provision for loan losses

     —          250   

Amortization of purchased loan premium

     306        384   

Provision for deferred income taxes

     563        390   

Amortization of security premiums and accretion of discounts, net

     1,041        793   

Net (gain) loss on sale of securities

     (278     116   

Net loss on sale and valuation of other real estate

     630        177   

Changes in assets and liabilities:

    

Decrease in loans held for sale

     121        231   

Decrease in other assets

     1,489        2,998   

Decrease in accrued expenses and other liabilities

     (351     (626
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,884        6,728   
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from available for sale securities

     73,068        34,320   

Proceeds from held to maturity securities

     3,526        5,171   

Proceeds from equity securities

     254        —     

Purchase of available for sale securities

     (38,990     (38,464

Purchase of equity securities

     (47     (67

Proceeds from sale of other real estate

     2,279        3,354   

Improvements and additions of other real estate, net of insurance proceeds

     (185     10   

Net increase in loans

     (4,022     (7,668

Principal recoveries of loans previously charged off

     246        417   

Purchase of premises and equipment, net

     (7     (113

Purchase of bank owned life insurance investment

     (5,000     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     31,122        (3,040
  

 

 

   

 

 

 

Financing activities:

    

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

     (32,260     10,566   

Net change in federal funds purchased

     (4,420     —     

Net decrease in Federal Home Loan Bank borrowings

     (174     —     

Cash dividends paid

     (221     (221
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (37,075     10,345   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (69     14,033   

Cash and cash equivalents:

    

Beginning of the period

   $ 24,137      $ 21,751   
  

 

 

   

 

 

 

End of the period

   $ 24,068      $ 35,784   
  

 

 

   

 

 

 

 

     March 31, 2013      March 31, 2012  

Supplemental disclosures of cash flow information:

     

Interest paid

   $ 1,996       $ 3,055   

Transfers of OREO property

     756         4,196   

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Community Bankers Trust Corporation (the “Company”) is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices in Virginia, Maryland and Georgia. 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 and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities. Thirteen offices are located in Virginia, from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market.

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, 2012. The accounting and reporting policies of the Company conform to 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 March 31, 2013, changes in stockholders’ equity and cash flows for the three months ended March 31, 2013, and the income statement and statement of other comprehensive income for the three months ended March 31, 2013. Results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

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

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

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

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires is already required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:

 

   

Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.

 

   

Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items, which are not required under U.S. GAAP to be reclassified directly to net income in their entirety in the same reporting period.

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company adopted this guidance with no material impact on its consolidated financial statements.

 

2. SECURITIES

Amortized costs and fair values of securities available for sale and held to maturity at March 31, 2013 and December 31, 2012 were as follows (dollars in thousands):

 

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

Securities Available for Sale

  

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

   $ 121,353       $ 429       $ (427   $ 121,355   

U.S. Gov’t sponsored agencies

     —           —           —          —     

State, county and municipal

     117,964         5,621         (526     123,059   

Corporate and other bonds

     5,453         74         (8     5,519   

Mortgage backed – U.S. Gov’t agencies

     10,996         276         —          11,272   

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

     12,634         293         (42     12,885   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Available for Sale

   $ 268,400       $ 6,693       $ (1,003   $ 274,090   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

State, county and municipal

   $ 11,819       $ 1,046       $ —        $ 12,865   

Mortgage backed – U.S. Gov’t agencies

     8,360         563         —          8,923   

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

     18,498         1,036         —          19,534   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 38,677       $ 2,645       $ —        $ 41,322   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2012  
     Gross Unrealized  
     Amortized
Cost
     Gains      Losses     Fair Value  

Securities Available for Sale

  

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

   $ 153,480       $ 362       $ (565   $ 153,277   

U.S. Gov’t sponsored agencies

     500         3         —          503   

State, county and municipal

     112,110         5,757         (271     117,596   

Corporate and other bonds

     7,530         96         (8     7,618   

Mortgage backed – U.S. Gov’t agencies

     15,192         378         (10     15,560   

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

     14,349         258         (83     14,524   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Available for Sale

   $ 303,161       $ 6,854       $ (937   $ 309,078   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

State, county and municipal

   $ 11,825       $ 1,142       $ —        $ 12,967   

Mortgage backed – U.S. Gov’t agencies

     9,112         615         —          9,727   

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

     21,346         1,188         —          22,534   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Securities Held to Maturity

   $ 42,283       $ 2,945       $ —        $ 45,228   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The amortized cost and fair value of securities at March 31, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties (dollars in thousands):

 

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

Due in one year or less

   $ 4,034       $ 4,146       $ 25,831       $ 26,037   

Due after one year through five years

     30,207         32,196         41,017         41,708   

Due after five years through ten years

     4,436         4,980         116,796         121,480   

Due after ten years

     —           —           84,756         84,865   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 38,677       $ 41,322       $ 268,400       $ 274,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gains and losses on the sale of securities are recorded on the settlement date and are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the periods were as follows (dollars in thousands):

 

     Three Months Ended  
     March 31, 2013     March 31, 2012  

Gross realized gains

   $ 321      $ 38   

Gross realized losses

     (43     (154
  

 

 

   

 

 

 

Net securities gains

   $ 278      $ (116
  

 

 

   

 

 

 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for each of the three months ended March 31, 2013 and 2012.

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 March 31, 2013 and December 31, 2012 were as follows (dollars in thousands):

 

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

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

   $ 78,555       $ (427   $ —         $ —        $ 78,555       $ (427

U.S. Gov’t sponsored agencies

     —           —          —           —          —           —     

State, county and municipal

     25,671         (523     262         (3     25,933         (526

Corporate and other bonds

     986         (8     —           —          986         (8

Mortgage backed – U.S. Gov’t agencies

     —           —          —           —          —           —     

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

     2,605         (42     —           —          2,605         (42
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 107,817       $ (1,000   $ 262       $ (3   $ 108,079       $ (1,003
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     December 31, 2012  
     Less than 12 Months     12 Months or More      Total  
     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss      Fair Value      Unrealized Loss  

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

   $ 70,561       $ (565   $ —         $ —         $ 70,561       $ (565

U.S. Gov’t sponsored agencies

     —           —          —           —           —           —     

State, county and municipal

     17,404         (271     —           —           17,404         (271

Corporate and other bonds

     1,485         (8     —           —           1,485         (8

Mortgage backed – U.S. Gov’t agencies

     1,688         (10     —           —           1,688         (10

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

     4,779         (83     —           —           4,779         (83
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95,917       $ (937   $ —         $ —         $ 95,917       $ (937
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses in the investment portfolio at March 31, 2013 and December 31, 2012 are generally a result of market fluctuations that occur daily. The unrealized losses are from 80 securities at March 31, 2013. Of those, 79 are investment grade, U.S. government agency guarantees, or the full faith and credit of local municipalities throughout the United States. Investment grade corporate obligations comprise the remaining one security with unrealized losses at March 31, 2013. The Company considers the reason for impairment, length of impairment and ability to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell and it is more likely than not that the Company will not be required to sell these securities until they recover in value.

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

Securities with amortized costs of $105.8 million and $111.7 million at March 31, 2013 and December 31, 2012, respectively, were pledged to secure deposits and for other purposes required or permitted by law. At each of March 31, 2013 and December 31, 2012, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government agencies, that comprised more than 10% of the consolidated shareholders’ equity.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

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

The Company’s non-covered loans at March 31, 2013 and December 31, 2012 were comprised of the following (dollars in thousands):

 

     March 31, 2013     December 31, 2012  
     Amount     % of Non-Covered
Loans
    Amount     % of Non-Covered
Loans
 

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 137,302        23.68   $ 135,420        23.53

Commercial

     239,794        41.35        246,521        42.82   

Construction and land development

     60,565        10.44        61,127        10.62   

Second mortgages

     7,326        1.26        7,230        1.26   

Multifamily

     36,344        6.27        28,683        4.98   

Agriculture

     9,616        1.66        10,359        1.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     490,947        84.66        489,340        85.01   

Commercial loans

     80,942        13.96        77,835        13.52   

Consumer installment loans

     6,523        1.12        6,929        1.20   

All other loans

     1,524        0.26        1,526        0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

     579,936        100.00     575,630        100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Less unearned income on loans

     (129       (148  
  

 

 

     

 

 

   

Non-covered loans, net of unearned income

   $ 579,807        $ 575,482     
  

 

 

     

 

 

   

The Company held $40.7 million and $40.9 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 March 31, 2013 and December 31, 2012, respectively. As these loans are 100% guaranteed by the USDA, no loan loss provision is required. These loan balances included an unamortized purchase premium of $3.2 million and $3.4 million at March 31, 2013 and December 31, 2012, respectively. Unamortized purchase premium is recognized as an adjustment of the related loan yield using the interest method.

At March 31, 2013 and December 31, 2012, the Company’s allowance for credit losses was comprised of the following: (i) specific valuation allowances calculated in accordance with FASB ASC 310, Receivables, (ii) general valuation allowances calculated in accordance with FASB ASC 450, Contingencies, based on economic conditions and other qualitative risk factors, and (iii) historical valuation allowances calculated using historical loan loss experience. Management identified loans subject to impairment in accordance with FASB ASC 310.

At March 31, 2013 and December 31, 2012, a portion of the construction and land development loans presented above contained interest reserve provisions. The Company follows standard industry practice to include interest reserves and capitalized interest in a construction loan. This practice recognizes interest as an additional cost of the project and, as a result, requires the borrower to put additional equity into the project. In order to monitor the project throughout its life to make sure the property is moving along as planned to ensure appropriateness of continuing to capitalize interest, the Company coordinates an independent property inspection in connection with each disbursement of loan funds. Until completion, there is generally no cash flow from which to make the interest payment. The Company does not advance additional interest reserves to keep a loan from becoming nonperforming.

There were no significant amounts of interest reserves recognized as interest income on construction loans with interest reserves for each of the three months ended March 31, 2013 and 2012. Nonperforming construction loans with interest reserves were $4.1 million and $4.8 million at March 31, 2013 and December 31, 2012, respectively.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There were no significant amounts recognized during either of the three months ended March 31, 2013 and 2012. For the three months ended March 31, 2013 and 2012, estimated interest income of $350,000 and $540,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

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

 

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

With an allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 4,212       $ 4,466       $ 974   

Commercial

     1,269         1,344         311   

Construction and land development

     5,473         6,790         696   

Second mortgages

     172         218         31   

Multifamily

     —          —           —     

Agriculture

     6         159        1   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     11,132         12,977         2,013   

Commercial loans

     285         1,096         72   

Consumer installment loans

     85         86         19   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans with valuation allowance

     11,502         14,159         2,104   
  

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     2,799         2,870         —    

Commercial

     2,584         2,814         —    

Construction and land development

     3,665         5,702         —    

Second mortgages

     —          —          —    

Multifamily

     —          —          —    

Agriculture

     228         233         —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     9,276         11,619         —    

Commercial loans

     —          —          —    

Consumer installment loans

     9         9         —    

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans without valuation allowance

     9,285         11,628         —    
  

 

 

    

 

 

    

 

 

 

Total:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     7,011         7,336         974   

Commercial

     3,853         4,158         311   

Construction and land development

     9,138         12,492         696   

Second mortgages

     172         218         31   

Multifamily

     —          —           —     

Agriculture

     234         392         1   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     20,408         24,596         2,013   

Commercial loans

     285         1,096         72   

Consumer installment loans

     94         95         19   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 20,787       $ 25,787       $ 2,104   
  

 

 

    

 

 

    

 

 

 

 

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes information related to impaired loans as of December 31, 2012 (dollars in thousands):

 

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

With an allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 3,838       $ 4,021       $ 897   

Commercial

     2,741         2,827         725   

Construction and land development

     7,412         10,355         850   

Second mortgages

     124         170         22   

Multifamily

     —          —          —    

Agriculture

     250        580        20  
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     14,365         17,953         2,514   

Commercial loans

     509         582         121   

Consumer installment loans

     78         79         21   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans with valuation allowance

     14,952         18,614         2,656   
  

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     2,702         3,094         —    

Commercial

     3,076         3,281         —    

Construction and land development

     1,578         1,961         —    

Second mortgages

     48         48         —    

Multifamily

     —          —          —    

Agriculture

     —           —           —    
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     7,404         8,384         —    

Commercial loans

     —           183         —    

Consumer installment loans

     9         9         —    

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal impaired loans without valuation allowance

     7,413         8,576         —    
  

 

 

    

 

 

    

 

 

 

Total:

        

Mortgage loans on real estate:

        

Residential 1-4 family

     6,540         7,115         897   

Commercial

     5,817         6,108         725   

Construction and land development

     8,990         12,316         850   

Second mortgages

     172         218         22   

Multifamily

     —          —          —    

Agriculture

     250         580         20  
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     21,769         26,337         2,514   

Commercial loans

     509         765         121   

Consumer installment loans

     87         88         21   

All other loans

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 22,365       $ 27,190       $ 2,656   
  

 

 

    

 

 

    

 

 

 

 

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes average recorded investment of impaired loans as of March 31, 2013 and March 31, 2012 (dollars in thousands):

 

     Three months ended  
     March 31, 2013      March 31, 2012  
     Average
Recorded
Investment
     Average
Recorded
Investment
 

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 6,775       $ 6,813   

Commercial

     4,835         13,723   

Construction and land development

     9,064         11,797   

Second mortgages

     172         218   

Multifamily

     —          —    

Agriculture

     242         54   
  

 

 

    

 

 

 

Total real estate loans

     21,088         32,605   

Commercial loans

     397         964   

Consumer installment loans

     91         140   

All other loans

     —          15  
  

 

 

    

 

 

 

Total impaired loans

   $ 21,576       $ 33,724   
  

 

 

    

 

 

 

The majority of impaired loans are also nonaccruing for which no interest income was recognized during each of the three months ended March 31, 2013 and 2012. No significant amounts of interest income were recognized on accruing impaired loans for each of the three months ended March 31, 2013 and 2012.

The following table presents non-covered nonaccruals by loan category as of March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 5,717       $ 5,562   

Commercial

     3,853         5,818   

Construction and land development

     8,772         8,815   

Second mortgages

     141         141   

Multifamily

     —           —    

Agriculture

     234         250   
  

 

 

    

 

 

 

Total real estate loans

     18,717         20,586   

Commercial loans

     161         385   

Consumer installment loans

     85         77   

All other loans

     —          —    
  

 

 

    

 

 

 

Total loans

   $ 18,963       $ 21,048   
  

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Troubled debt restructures, special mention, some substandard, and doubtful loans 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 March 31, 2013 and December 31, 2012, is set forth in the table below (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

Nonaccruals

   $ 18,963       $ 21,048   

Troubled debt restructure and still accruing

     947         847   

Special mention

     296         299   

Substandard and still accruing

     581         171   

Doubtful and still accruing

     —           —     
  

 

 

    

 

 

 

Total impaired

   $ 20,787       $ 22,365   
  

 

 

    

 

 

 

The following tables present an age analysis of past due status of non-covered loans by category as of March 31, 2013 and December 31, 2012 (dollars in thousands):

 

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

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,329       $ 5,952       $ 7,281       $ 130,021       $ 137,302       $ 235  

Commercial

     125         3,853         3,978         235,816         239,794         —     

Construction and land development

     318         9,002         9,320         51,245         60,565         230   

Second mortgages

     31         141         172         7,154         7,326         —     

Multifamily

     —           —           —           36,344         36,344         —     

Agriculture

     —           234         234         9,382         9,616         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,803         19,182         20,985         469,962         490,947         465  

Commercial loans

     1,670         161         1,831         79,111         80,942         —     

Consumer installment loans

     15         85         100         6,423         6,523         —     

All other loans

     —           —           —           1,524         1,524         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,488       $ 19,428       $ 22,916       $ 557,020       $ 579,936       $ 465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     December 31, 2012  
     30-89
Days
Past
Due
     90 Days
Past Due
     Total
Past
Due
     Current      Total
Loans
     Recorded
Investment
90 Days
Past Due
and
Accruing
 

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,433       $ 5,797       $ 7,230       $ 128,190       $ 135,420       $ 235  

Commercial

     —           5,818         5,818         240,703         246,521         —     

Construction and land development

     298         9,089         9,387         51,740         61,127         274  

Second mortgages

     —           141         141         7,089         7,230         —    

Multifamily

     —          —          —          28,683         28,683         —    

Agriculture

     —          250         250         10,109         10,359         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,731         21,095         22,826         466,514         489,340         509   

Commercial loans

     85         385         470         77,365         77,835         —    

Consumer installment loans

     40         77         117         6,812         6,929         —    

All other loans

     —          —          —          1,526         1,526         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,856       $ 21,557       $ 23,413       $ 552,217       $ 575,630       $ 509   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Activity in the allowance for loan losses on non-covered loans for the three months ended March 31, 2013 and the year ended December 31, 2012 was comprised of the following (dollars in thousands):

 

                                                                                              
     December 31, 2012      Provision
Allocation
    Charge
offs
    Recoveries      March 31, 2013  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 3,985       $ 11      $ (34   $ 46      $ 4,008   

Commercial

     2,482         506        (579     5         2,414   

Construction and land development

     3,773         (565     —         149         3,357   

Second mortgages

     142         (41     —         4         105   

Multifamily

     303         13        —         —          316   

Agriculture

     61         1        —         —          62   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     10,746         (75     (613     204         10,262   

Commercial loans

     1,961         86        (252     21         1,816   

Consumer installment loans

     195         (21     (43     21         152   

All other loans

     18         10        —         —          28   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 12,920       $ —       $ (908   $ 246       $ 12,258   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     December 31, 2011      Provision
Allocation
    Charge offs     Recoveries      December 31, 2012  

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 3,451       $ 2,283      $ (1,786   $ 37       $ 3,985   

Commercial

     3,048         15        (654     73         2,482   

Construction and land development

     5,729         (1,539     (2,058     1,641         3,773   

Second mortgages

     296         (165     (45     56         142   

Multifamily

     224        79        —          —           303   

Agriculture

     25         75        (39 )     —           61   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     12,773         748        (4,582     1,807         10,746   

Commercial loans

     1,810         604        (695     242         1,961   

Consumer installment loans

     241         91        (220     83         195   

All other loans

     11         7        —          —           18   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 14,835       $ 1,450      $ (5,497   $ 2,132       $ 12,920   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present information on the non-covered loans evaluated for impairment in the allowance for loan losses as of March 31, 2013 and December 31, 2012 (dollars in thousands):

 

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

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,047       $ 2,961       $ 4,008       $ 9,968       $ 127,334       $ 137,302   

Commercial

     423         1,991         2,414         13,056         226,738         239,794   

Construction and land development

     1,056         2,301         3,357         14,034         46,531         60,565   

Second mortgages

     37         68         105         233         7,093         7,326   

Multifamily

     —           316         316         —           36,344         36,344   

Agriculture

     1         61         62         233         9,383         9,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     2,564         7,698         10,262         37,524         453,423         490,947   

Commercial loans

     76         1,740         1,816         379         80,563         80,942   

Consumer installment loans

     21         131         152         101         6,422         6,523   

All other loans

     —           28         28         —           1,524         1,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,661       $ 9,597       $ 12,258       $ 38,004       $ 541,932       $ 579,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

     December 31, 2012  
     Allowance for Loan Losses      Recorded Investment in Loans  
     Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Total      Individually
Evaluated for
Impairment (1)
     Collectively
Evaluated for
Impairment
     Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,003       $ 2,982       $ 3,985       $ 10,340       $ 125,080       $ 135,420   

Commercial

     864         1,618         2,482         15,636         230,885         246,521   

Construction and land development

     1,306         2,467         3,773         14,173         46,954         61,127   

Second mortgages

     29         113         142         234         6,996         7,230   

Multifamily

     —           303         303         —           28,683         28,683   

Agriculture

     21        40         61         250         10,109         10,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     3,223         7,523         10,746         40,633         448,707         489,340   

Commercial loans

     125         1,836         1,961         605         77,230         77,835   

Consumer installment loans

     22         173         195         92         6,837         6,929   

All other loans

     —           18         18         —           1,526         1,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,370       $ 9,550       $ 12,920       $ 41,330       $ 534,300       $ 575,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The category “Individually Evaluated for Impairment” includes loans individually evaluated for impairment and determined not to be impaired. These loans total $17.2 million and $19.0 million at March 31, 2013 and December 31, 2012, respectively. The allowance for loans losses allocated to these loans is $557,000 and $714,000 at March 31, 2013 and December 31, 2012, respectively.

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

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $40.7 million and $40.9 million at March 31, 2013 and December 31, 2012, respectively.

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

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

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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following tables present the composition of non-covered loans by credit quality indicator at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31, 2013  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 121,260       $ 6,493       $ 9,549       $ —         $ 137,302   

Commercial

     203,087         23,651         12,900         156        239,794   

Construction and land development

     36,924         9,779         13,862         —           60,565   

Second mortgages

     6,756         337         233         —           7,326   

Multifamily

     35,777         567         —           —           36,344   

Agriculture

     9,382         —           234         —           9,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     413,186         40,827         36,778         156        490,947   

Commercial loans

     79,657         1,030         255         —           80,942   

Consumer installment loans

     6,199         223         101         —           6,523   

All other loans

     1,524         —           —           —           1,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 500,566       $ 42,080       $ 37,134       $ 156       $ 579,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 118,931       $ 6,496       $ 9,993       $ —         $ 135,420   

Commercial

     209,347         21,540         15,478         156        246,521   

Construction and land development

     36,261         10,954         13,912         —           61,127   

Second mortgages

     6,519         477         234         —           7,230   

Multifamily

     27,514         1,169         —           —           28,683   

Agriculture

     10,109         —           250         —           10,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     408,681         40,636         39,867         156         489,340   

Commercial loans

     76,148         1,205         482         —           77,835   

Consumer installment loans

     6,617         220         92         —           6,929   

All other loans

     1,526         —           —           —           1,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 492,972       $ 42,061       $ 40,441       $ 156       $ 575,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

In accordance with FASB ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. No loans were modified during either of the three months ended March 31, 2013 and March 31, 2012 that were considered to be TDRs.

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that resulted in default during the three months ended March 31, 2013 that had been restructured during the previous 12 months. The following table presents information relating to TDRs that resulted in default during the three months ended March 31, 2012 (dollars in thousands):

 

     Three months ended March 31, 2012  
     Number
of
Contracts
     Recorded Investment  

Mortgage loans on real estate:

     

Residential 1-4 family

     1       $ 100   

Construction and land development

     1         54   
  

 

 

    

 

 

 

Total real estate loans

     2         154   
  

 

 

    

 

 

 

Total loans

     2       $ 154   
  

 

 

    

 

 

 

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 March 31, 2013, the Company had 1-4 family mortgages in the amount of $150.8 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $95.2 million.

 

4. LOANS COVERED BY FDIC SHARED LOSS AGREEMENT (COVERED 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 “covered loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

As of March 31, 2013 and December 31, 2012, the outstanding contractual balance of the covered loans was $133.2 million and $137.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

     March 31, 2013     December 31, 2012  
     Amount      % of
Covered
Loans
    Amount      % of
Covered
Loans
 

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 72,310         87.79   $ 74,046         87,47

Commercial

     1,941         2.36        1,986         2.35   

Construction and land development

     2,979         3.62        3,264         3.86   

Second mortgages

     4,696         5.70        4,864         5.75   

Multifamily

     266         0.32        304         0.36   

Agriculture

     171         0.20        172         0.20   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     82,363         99.99        84,636         99.99   

Commercial loans

     —           —          —           —     

Consumer installment loans

     1         0.01        1         0.01   

All other loans

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total covered loans

   $ 82,364         100.00   $ 84,637         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Activity in the allowance for loan losses on covered loans for the three months ended March 31, 2013 and the year ended December 31, 2012 was comprised of the following (dollars in thousands):

 

     December 31, 2012      Provision
Allocation
    Charge
offs
    Recoveries        March 31, 2013    

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 252       $ —        $ —        $ —         $ 252   

Commercial

     232         —          —          —           232   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate loans

     484         —          —          —           484   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total covered loans

   $ 484       $   —        $   —        $   —         $ 484   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     December 31, 2011      Provision
Allocation
    Charge
offs
    Recoveries     December 31, 2012  

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 473       $ (218   $ (12   $ 9      $ 252   

Commercial

     303         (71     —          —          232   

Construction and land development

     —           4        (22     18        —     

Multifamily

     —           35        (315     280        —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     776         (250     (349     307        484   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans

   $ 776       $ (250   $ (349   $ 307      $ 484   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

The following table presents information on the covered loans collectively evaluated for impairment in the allowance for loan losses at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31, 2013      December 31, 2012  
     Allowance for
loan losses
     Recorded
investment
in loans
     Allowance for
loan losses
     Recorded
investment
in loans
 

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 252       $ 72,310       $ 252       $ 74,046   

Commercial

     232         1,941         232         1,986   

Construction and land development

     —           2,979         —           3,264   

Second mortgages

     —           4,696         —           4,864   

Multifamily

     —           266         —           304   

Agriculture

     —           171         —           172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     484         82,363         484         84,636   

Commercial loans

     —           —           —           —     

Consumer installment loans

     —           1         —           1   

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 484       $ 82,364       $ 484       $ 84,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in the accretable yield balance for the three months ended March 31, 2013 and the year ended December 31, 2012 is as follows (dollars in thousands):

 

Balance, January 1, 2012

   $ 56,310   

Accretion

     (14,105

Reclassification from nonaccretable Yield

     11,939   
  

 

 

 

Balance, December 31, 2012

     54,144   

Accretion

     (2,655

Reclassification to nonaccretable Yield

     (361
  

 

 

 

Balance, March 31, 2013

   $ 51,128   
  

 

 

 

The covered loans are not classified as nonperforming assets as of March 31, 2013, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all covered loans.

 

5. FDIC AGREEMENTS AND FDIC INDEMNIFICATION ASSET

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

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

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

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

As discussed above, the shared loss agreement for assets other than single family one-to-four residential mortgage assets expires January 2014. The portion of the FDIC indemnification asset related to those assets was $1.1 million at March 31, 2013, of which $304,000 represents estimated losses to be reimbursed by the FDIC.

The following table presents the balances of the FDIC indemnification asset at March 31, 2013 and December 31, 2012 (dollars in thousands):

 

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

Total
 

January 1, 2012

   $ 28,713      $ 22,971      $ 19,670      $ 42,641   

Increases:

        

Writedown of OREO property to FMV

     622        497          497   

Decreases:

        

Net amortization of premium

         (6,936     (6,936

Reclassifications to FDIC receivable:

        

Net loan charge offs and recoveries

     (1,321     (1,057       (1,057

OREO sales

     (1,140     (912       (912

Reimbursements requested from FDIC

     (495     (396       (396

Reforecasted Change in Anticipated Expected Losses

     (3,174     (2,539     2,539        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

   $ 23,205      $ 18,564      $ 15,273      $ 33,837   

Increases:

        

Writedown of OREO property to FMV

     38        30          30   

Decreases:

        

Net amortization of premium

         (1,501     (1,501

Reclassifications to FDIC receivable:

        

Net loan charge offs and recoveries

     (450     (360       (360

OREO sales

     (506     (405       (405

Reimbursements requested from FDIC

     (105     (84       (84

Reforecasted Change in Anticipated Expected Losses

     (1,054     (843     843        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2013

   $ 21,128      $ 16,902      $ 14,615        31,517   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

6. OTHER INTANGIBLES

Core deposit intangible assets are amortized over the period of expected benefit, ranging from 2.6 to 9 years. Core deposit intangibles are recognized, amortized and evaluated for impairment as required by FASB ASC 350, Intangibles. As a result of the mergers with TransCommunity Financial Corporation (TFC), and BOE Financial Services of Virginia, Inc. (BOE) on May 31, 2008, the Company recorded $15.0 million in core deposit intangible assets. Core deposit intangibles resulting from the Georgia and Maryland transactions, in 2008 and 2009, respectively, equaled $3.2 million and $2.1 million, respectively, and will be amortized over approximately 9 years. The Company estimates that it will recognize $2.3 million of amortization expense in each of the next five years.

Other intangible assets are presented in the following table (dollars in thousands):

 

     March 31, 2013     December 31, 2012  

Core deposit intangible

   $ 20,290      $ 20,290   

Accumulated amortization

     (10,559     (9,993
  

 

 

   

 

 

 

Balance

   $ 9,731      $ 10,297   
  

 

 

   

 

 

 

 

7. DEPOSITS

The following table provides interest bearing deposit information, by type, as of March 31, 2013 and December 31, 2012 (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

NOW

   $ 126,784       $ 142,923   

MMDA

     112,473         113,171   

Savings

     79,988         77,506   

Time deposits less than $100,000

     284,936         287,422   

Time deposits $100,000 and over

     256,547         275,318   
  

 

 

    

 

 

 

Total interest bearing deposits

   $ 860,728       $ 896,340   
  

 

 

    

 

 

 

 

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables present activity in accumulated other comprehensive income for the three months ended March 31, 2013 and 2012 (dollars in thousands, net of tax):

 

    Three months ended March 31, 2013  
    Unrealized
Gain/(Loss)  on
Securities
    Defined Benefit
Pension Plan
    Total Other
Comprehensive
Income
 

Beginning balance

  $ 3,866      $ (1,038   $ 2,828   

Other comprehensive income before reclassifications

    32        —          32   

Amounts reclassified from accumulated other comprehensive income

    (183     —          (183
 

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

    (151     —          (151
 

 

 

   

 

 

   

 

 

 

Ending balance

  $ 3,715      $ (1,038   $ 2,677   
 

 

 

   

 

 

   

 

 

 

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

    Three months ended March 31, 2012  
    Unrealized
Gain/(Loss)  on
Securities
    Defined Benefit
Pension Plan
    Total Other
Comprehensive
Income
 

Beginning balance

  $ 3,257      $ (1,038   $ 2,219   

Other comprehensive income before reclassifications

    (619     —          (619

Amounts reclassified from accumulated other comprehensive income

    76        —          76   
 

 

 

   

 

 

   

 

 

 

Net current period other comprehensive loss

    (543     —          (543
 

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,714      $ (1,038   $ 1,676   
 

 

 

   

 

 

   

 

 

 

The following table presents the effects of reclassifications out of accumulated other comprehensive income on line items of consolidated income for the three months ended March 31, 2013 and 2012 (dollars in thousands):

 

Details about Accumulated Other

Comprehensive Income Components

  Amount Reclassified from Accumulated
Other Comprehensive Income
   

Affected Line Item in the Unaudited

Consolidated Statement of Income

    Three months ended      
    March 31, 2013     March 31, 2012      

Unrealized gain (loss) on securities available for sale

  $ (278   $ 116     

Gain (loss) on securities transactions, net

    95        (40  

Tax expense

 

 

 

   

 

 

   
  $ (183   $ 76     

Net of tax

 

 

 

   

 

 

   

 

9. FAIR VALUES OF ASSETS AND LIABILITIES

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

 

   

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

 

   

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

 

   

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

FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of March 31, 2013.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

 

     March 31, 2013  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

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

   $ 121,355       $ 121,355       $ —         $ —     

U.S. Gov’t sponsored agencies

     —           —           —           —     

State, county, and municipal

     123,059         2,602         120,457         —     

Corporate and other bonds

     5,519         —           5,519         —     

Mortgage backed – U.S. Gov’t agencies

     11,272         —           11,272         —     

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

     12,885         —           12,885         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     274,090         123,957         150,133         —     

Loans held for resale

     1,145         —           1,145         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 275,235       $ 123,957       $ 151,278       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

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

   $ 153,277       $ 153,277       $ —         $ —     

U.S. Gov’t sponsored agencies

     503         —           503         —     

State, county and municipal

     117,596         6,742         110,854         —     

Corporate and other bonds

     7,618         1,009         6,609         —     

Mortgage backed – U.S. Gov’t agencies

     15,560         —           15,560         —     

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

     14,524         —           14,524         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     309,078         161,028         148,050         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for resale

     1,266         —           1,266         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 310,344       $ 161,028       $ 149,316       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities available for sale

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

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

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Loans held for resale

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. For assets measured at fair value on a nonrecurring basis in 2013 and still held on the consolidated balance sheet at March 31, 2013, the following table provides the fair value measures by level of valuation assumptions used for those assets (dollars in thousands).

 

     March 31, 2013  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 14,067       $ —         $ 4,562       $ 9,505   

Other real estate owned (OREO), non-covered

     9,712         —           —           9,712   

Other real estate owned (OREO), covered

     2,483         —           —           2,483   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 26,262         —         $ 4,562       $ 21,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 15,552       $ —         $ 4,039       $ 11,513   

Other real estate owned (OREO), non-covered

     10,793         —           —           10,793   

Other real estate owned (OREO), covered

     3,370         —           —           3,370   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 29,715       $ —         $ 4,039       $ 25,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans, non-covered

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At March 31, 2013 and December 31, 2012, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 12 months old. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan within Level 2.

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Other real estate owned, covered and non-covered

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

Fair Value of Financial Instruments

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

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

 

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

Financial assets:

              

Securities held to maturity

   $ 38,677       $ 41,322       $ —         $ 41,322       $ —     

Loans, non-covered

     567,549         586,249         —           576,744         9,505   

Loans, covered

     81,880         93,253         —           —           93,253   

FDIC indemnification asset

     31,517         15,428         —           —           15,428   

Financial liabilities:

              

Interest bearing deposits

     860,728         837,156         —           837,156         —     

Borrowings

     53,778         54,148         —           54,148         —     

 

     December 31, 2012  
     Carrying Value      Estimated  Fair
Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Securities held to maturity

   $ 42,283       $ 45,228       $ —         $ 45,228       $ —     

Loans, non-covered

     562,562         569,188         —           557,675         11,513   

Loans, covered

     84,153         96,024         —           —           96,024   

FDIC indemnification asset

     33,837         17,477         —           —           17,477   

Financial liabilities:

              

Interest bearing deposits

     896,340         872,920         —           872,920         —     

Borrowings

     53,952         54,569         —           54,569         —     

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of March 31, 2013. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Financial Assets

Cash and cash equivalents

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

Securities held for investment

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

Restricted securities

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

Loans held for resale

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

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

For certain homogeneous categories of loans, such as some residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans included here is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above.

Loans covered by FDIC shared loss agreement (covered loans)

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

FDIC indemnification asset

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value.

Financial Liabilities

Noninterest bearing deposits

The carrying amount of noninterest bearing deposits approximates fair value.

Interest bearing deposits

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

Federal funds purchased

The carrying amount of federal funds purchased approximates fair value.

Borrowings

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

Accrued interest payable

The carrying amounts of accrued interest payable approximate fair value.

Off-balance sheet financial instruments

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

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

10. EARNINGS PER SHARE

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

 

    

Net

Income

(Numerator)

    

Weighted

Average

Shares

(Denominator)

    

Per Common Share

Amount

 

For the three months ended March 31, 2013

        

Shares issued

        21,675      

Unissued vested restricted stock

        7      
     

 

 

    

Basic EPS

   $ 1,045         21,682       $ 0.05   

Effect of dilutive stock awards

     —           157         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1,045         21,839       $ 0.05   
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012

        

Shares issued

        21,628      

Unissued vested restricted stock

        3      
     

 

 

    

Basic EPS

   $ 714         21,631       $ 0.03   

Effect of dilutive stock awards

     —           11         —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 714         21,642       $ 0.03   
  

 

 

    

 

 

    

 

 

 

Excluded from the computation of diluted earnings per share were 871,000 and 1.9 million common shares issuable under awards, options or warrants, during the three months ended March 31, 2013 and 2012 respectively, because their inclusion would be anti-dilutive.

In December 2008, the Company issued 17,680 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A to the United States Department of Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program. Cumulative dividends on the Series A Preferred Stock are payable at 5% per annum through December 19, 2013, and at a rate of 9% per annum thereafter. The Company may defer dividend payments, but the dividend is a cumulative dividend that accrues for payment in the future. Deferred dividends also accrue interest at the same rate as the dividend. The failure to pay dividends for six dividend periods triggers the right for the holder of the Series A Preferred Stock to appoint two directors to the Company’s board.

As of March 31, 2013, the Company is current in its payment of dividends, payable quarterly in the amount of $221,000, with respect to the Series A Preferred Stock.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Unaudited Consolidated Financial Statements

 

11. DEFINED BENEFIT PLAN

On May 31, 2008, the Company adopted the Bank of Essex noncontributory defined benefit pension plan for all full-time pre-merger Bank employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. The Company has frozen the plan benefits for all participants effective December 31, 2010. The following table presents the components of net periodic benefit cost for the three months ended March 31, 2013 and 2012 (dollars in thousands):

 

     Three months ended  
     March 31, 2013     March 31, 2012  

Service cost

   $ —        $ —     

Interest cost

     56        63   

Expected return on plan assets

     (101     (102

Recognized net actuarial (gain) loss

     17        17   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ (28   $ (22
  

 

 

   

 

 

 

As of March 31, 2013, there had been no employer contributions for the plan year. The Company is considering terminating the pension plan in the future. No determination has been made and the Company has not determined the financial impact of the termination of the plan.

 

12. CONTINGENCIES

See the Annual Report on Form 10-K for the period ended December 31, 2012 for information with respect to transaction-based bonus awards that the Company approved for the Company’s then chief strategic officer in the first quarter of 2010 and paid in the first and second quarters of 2010. There have been no developments to the issues disclosed in the 2010 Form 10-K and, as of May 14, 2013, these issues remain open.

 

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

The following discussion and analysis of the financial condition at March 31, 2013 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three months ended March 31, 2013 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, 2012.

OVERVIEW

The Company is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices in Virginia, Maryland and Georgia. 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 and small businesses, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities. Thirteen offices are located in Virginia, from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market.

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

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

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

 

   

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

 

   

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

 

   

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

 

   

the ability of the Company to comply with regulatory actions, and the costs associated with doing so;

 

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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;

 

   

the Company’s compliance with, and the timing of future reimbursements from the FDIC to the Company under, the shared loss agreements;

 

   

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

 

   

consumer profiles and spending and savings habits;

 

   

levels of fraud in the banking industry;

 

   

the level of attempted cyber attacks in the banking industry;

 

   

the securities and credit markets;

 

   

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

 

   

management’s evaluation of goodwill and other assets on a periodic basis, and any resulting impairment charges, under applicable accounting standards;

 

   

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, 2012 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

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

CRITICAL ACCOUNTING POLICIES

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

 

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

Allowance for Loan Losses on Non-covered Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the 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 quarterly evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

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

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

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

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

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

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the covered loans), subject to FASB ASC Topic 805, Business Combinations (formerly SFAS 141(R)), are recorded at fair value and no separate valuation allowance

 

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was recorded at the date of acquisition. FASB ASC 310-30, 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 covered loans are subject to the credit review standards described above for non-covered loans. If and when credit deterioration occurs subsequent to the date that the covered loans were acquired, a provision for credit loss for covered loans will be charged to earnings for the full amount without regard to the shared loss agreements.

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

FDIC Indemnification Asset

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

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

Other Intangible Assets

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

 

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Income Taxes

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of operations. Under FASB ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable. Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $5.9 million. Management expects to utilize all of these carryforward amounts prior to expiration.

The Company and its subsidiaries are subject to U. S. federal income tax as well as various state income taxes. All years from 2009 through 2012 are open to examination by the respective tax authorities.

Other Real Estate Owned

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

RESULTS OF OPERATIONS

Overview

Net income was $1.3 million for the first quarter of 2013 compared with net income of $990,000 in the first quarter of 2012. Net income available to common stockholders was $1.0 million in the first quarter of 2013 compared with net income available to common stockholders of $714,000 in the first quarter of 2012. Earnings per common share, basic and fully diluted, were $0.05 per share for the first quarter of 2013 compared with $0.03 per share for the first quarter of 2012.

The increase of $334,000 in net income year over year was driven by a decrease in noninterest expense of $1.2 million, or 11.4%. A reduction in the FDIC assessment of $417,000 was the largest noninterest expense decrease when comparing the first quarter of 2013 to the same period in 2012. Also decreasing was FDIC indemnification asset amortization, which was $1.5 million in the first quarter of 2013 compared with $1.9 million in the first quarter of 2012, a decline of $381,000, or 20.2%. Salaries and employee benefits decreased $245,000 year over year, and other operating expenses decreased $112,000 year over year. Improvement in noninterest expense was offset by a decrease of $575,000 in net interest income after provision for loan losses and a decrease of $95,000 in noninterest

 

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income. Gain/loss on other real estate owned (OREO) reflected losses and write-downs on bank owned properties of $630,000 in the first quarter of 2013 compared with losses and write-downs of $177,000 for the same period of 2012. Management continues to resolve problem credits with aggressive valuation and disposition.

Net Interest Income

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

Year over year, net interest income decreased $825,000, or 7.4%, from $11.1 million in the first quarter of 2012 to $10.3 million in the first quarter of 2013. This was primarily the result of a decrease in the Company’s interest spread, from 4.59% in the first quarter of 2012 to 4.10% in the first quarter of 2013. While the cost of interest bearing liabilities declined 37 basis points, year over year, from 1.20% to 0.83%, the yield on earning assets declined by a larger degree, from 5.79% to 4.93%, or 86 basis points. This decreased the Company’s net interest margin from 4.65% in the first quarter of 2012 to 4.17% for the same period in 2013.

 

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The following tables set forth, for each category of interest earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three months ended March 31, 2013 and 2012. The table also sets forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

 

     Three months ended March 31, 2013     Three months ended March 31, 2012  
(dollars in thousands)    Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/Paid
    Average
Balance
Sheet
    Interest
Income/
Expense
     Average
Rates
Earned/Paid
 

ASSETS:

              

Loans, non-covered, including fees

   $ 579,635      $ 7,511         5.26   $ 549,019      $ 7,687         5.60

FDIC covered loans, including fees

     82,776        2,659         13.03        95,546        3,914         16.39   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     662,411        10,170         6.23        644,565        11,601         7.20   

Interest bearing bank balances

     16,402        8         0.20        16,565        12         0.28   

Federal funds sold

     9,811        2         0.10        2,967        1         0.10   

Securities (taxable)

     300,001        1,838         2.45        282,510        2,077         2.94   

Securities (tax exempt)(1)

     17,903        225         5.02        12,314        179         5.81   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total earning assets

     1,006,528        12,243         4.93        958,921        13,870         5.79   

Allowance for loan losses

     (13,470          (15,711     

Non-earning assets

     132,378             150,278        
  

 

 

        

 

 

      

Total assets

   $ 1,125,436           $ 1,093,488        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Demand - interest bearing

   $ 245,714      $ 191         0.32      $ 235,663      $ 244         0.41   

Savings

     78,377        62         0.32        71,148        72         0.41   

Time deposits

     551,125        1,448         1.07        559,709        2,037         1.46   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total deposits

     875,216        1,701         0.79        866,520        2,353         1.09   

Federal funds purchased

     329        1         0.72        185        —           0.61   

FHLB and other borrowings

     53,938        192         1.45        41,124        359         3.50   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing liabilities

     929,483        1,894         0.83        907,829        2,712         1.20   

Noninterest bearing deposits

     75,551             69,036        

Other liabilities

     4,117             4,868        
  

 

 

        

 

 

      

Total liabilities

     1,009,151             981,733        

Stockholders’ equity

     116,285             111,755        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,125,436           $ 1,093,488        
  

 

 

        

 

 

      

Net interest earnings

     $ 10,349           $ 11,158      
    

 

 

        

 

 

    

Net interest spread

          4.10             4.59   

Net interest margin

          4.17             4.65   

 

(1) 

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

Provision for Loan Losses

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

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

 

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

There was no provision for loan losses for the quarter ended March 31, 2013 compared with a provision for loan losses of $250,000 for the quarter ended March 31, 2012. The lack of the need for a provision for the current quarter was the result of increased coverage levels for the ratio of allowance for loan losses to nonperforming loans and the ratio of allowance for loan losses to nonaccrual loans, as well as decrease in both the level of nonperforming assets to loans and other real estate and the level of net charge-offs for the quarter.

The Company records a separate provision for loan losses for its non-covered loan portfolio and its FDIC covered loan portfolio. The provision for loan losses on covered loans was a $250,000 credit for the quarter ended March 31, 2012, the result of improvement in expected losses on the Company’s FDIC covered portfolio. There was a provision of $500,000 for the quarter ended March 31, 2012 on the non-covered portfolio. As a result, the reported provision for loan losses reflects both the covered credit of $250,000 and the non-covered provision of $500,000, or a net provision of $250,000 for the quarter ended March 31, 2012.

There were net charge-offs of $662,000 in the first quarter of 2013 compared with $1.4 million in the first quarter of 2012. Total charge-offs for the first quarter of 2013 were $908,000 compared with $1.6 million in the first quarter of 2012. Recoveries of previously charged-off loans were $246,000 in the first quarter of 2013 compared with $157,000 in the first quarter of 2012.

Noninterest Income

Year over year, noninterest income decreased $95,000, from $825,000 in the first quarter of 2012 to $730,000 in the first quarter of 2013. Gain/(loss) on OREO was the largest contributor to this decrease, which reflected a loss on the sale and write-down of bank properties of $630,000 in the first quarter of 2013 compared with a loss of $177,000 in the first quarter of 2012. Other noninterest income declined $82,000 and was $419,000 in the first quarter of 2013 compared with $501,000 in the first quarter of 2012.

Offsetting these decreases was an increase of $394,000 in gains/(loss) on sale of securities. Gains/(loss) on sale of securities reflected gains of $278,000 in the first quarter of 2013 and losses of $116,000 in the first quarter of 2012. Also, service charges on deposit accounts increased $46,000 year-over-year, and were $663,000 for the first quarter of 2013 compared with $617,000 for the first quarter of 2012.

Noninterest Expense

Noninterest expenses declined $1.2 million, or 11.4%, when comparing the first quarter of 2013 to the same period in 2012. FDIC assessment declined $417,000, from $584,000 in the first quarter of 2012 to $167,000 in the first quarter of 2013. FDIC indemnification asset amortization decreased $381,000, year-over-year, from $1.9 million for the first quarter of 2012 to $1.5 million for the same period in 2013. Salaries and employee benefits decreased $245,000, from $4.2 million in the first quarter of 2012 to $4.0 million in the first quarter of 2013. Other operating expenses declined $112,000, from $1.5 million in the first quarter of 2012 to $1.4 million in the first quarter of 2013. Other decreases, year-over-year, were in professional fees ($35,000), equipment expense ($28,000), and legal fees ($11,000).

Only occupancy expenses and data processing expenses exhibited year-over-year increases. Occupancy expenses increased $32,000, from $631,000 in the first quarter of 2012 to $663,000 for the same period in 2013. Data processing fees increased $20,000, from $517,000 in the first quarter of 2012 to $537,000 in the first quarter of 2013.

 

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Income Taxes

Income tax expense was $563,000 for the three months ended March 31, 2013, compared with income tax expense of $390,000 in the first quarter of 2012. The effective tax rate was 29.8% for the first quarter of 2013 compared with 28.3% for the first quarter of 2012.

FINANCIAL CONDITION

General

At March 31, 2013, the Company had total assets of $1.117 billion, a decrease of $36.2 million, or 3.1%, from total assets of $1.153 billion at December 31, 2012. Total loans were $662.2 million at March 31, 2013, increasing $2.1 million from $660.1 million at December 31, 2012. The carrying value of FDIC covered loans declined $2.3 million, or 2.7%, from December 31, 2012 and were $82.4 million at March 31, 2013. Non-covered loans equaled $579.8 million at March 31, 2013, increasing $4.3 million since December 31, 2012.

Multifamily loans increased $7.7 million, or 26.7%, and ended the first quarter of 2013 at $36.3 million. Since March 31, 2012 multifamily loans have increased $16.6 million, or 83.7%, and exhibited the largest dollar increase for both the first quarter of 2013 and over the March 31, 2013 to March 31, 2012 time frame. Commercial loans increased $3.1 million, or 4.0%, and were $80.9 million at March 31, 2013. Commercial real estate loans decreased $6.7 million, or 2.7%, during the first quarter of 2013 and were $239.8 million at March 31, 2013.

The Company’s securities portfolio, excluding equity securities, decreased $38.6 million, or 11.0%, from $351.4 million at December 31, 2012 to $312.8 million at March 31, 2013. Realized gains of $278,000 occurred during the first quarter of 2013 through sales and call activity. The Company took a short-term position in a $40 million U.S. Treasury issue at December 31, 2012 to fully invest short-term excess cash balances on deposit by local municipal governments. The issue matured in the first quarter of 2013 and is the primary factor for the decrease in securities balances in the first quarter of 2013. The maturity of these funds was not reinvested but was offset by a decline in public funds.

The Company had cash and cash equivalents of $24.1 million at both March 31, 2013 and December 31, 2012. There was $992,000 in federal funds purchased at March 31, 2013 compared with $5.4 million in federal funds purchased at December 31, 2012.

The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under FASB ASC 320, Investments – Debt and Equity Securities. The market value of the AFS portfolio was $274.1 million at March 31, 2013 and $309.1 million at December 31, 2012. At March 31, 2013, the Company had a net unrealized gain on the AFS portfolio of $5.7 million compared with a net unrealized gain of $5.9 million at December 31, 2012.

Interest bearing deposits at March 31, 2013 were $860.7 million, a decrease of $35.6 million from December 31, 2012. Time deposits $100,000 and over decreased $18.8 million during the quarter ended March 31, 2013 as the Company did not renew a $20 million public funds certificate of deposit. NOW accounts decreased $16.1 million, or 11.3%, during the first quarter of 2013, and were impacted by seasonality and anticipated outflows of public funds accumulated in the fourth quarter of 2012. Time deposits less than $100,000 decreased $2.5 million during the first quarter of 2013, and MMDA accounts declined $698,000. Savings deposits increased $2.5 million during the quarter ended March 31, 2013.The Company’s total loan-to-deposit ratio was 70.3% at March 31, 2013 compared with 67.8% at December 31, 2012.

The Company had Federal Home Loan Bank (FHLB) advances of $49.7 million at March 31, 2013 compared with $49.8 million at December 31, 2012. The blended rate on the average balance of these borrowings was 1.45% during the first quarter of 2013.

 

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Stockholders’ equity was $116.3 million at March 31, 2013 and $115.3 million at December 31, 2012. The equity-to-asset ratios were 10.4% at March 31, 2013 and 10.0% at December 31, 2012.

Asset Quality – non-covered assets

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

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

The Company maintains a list of non-covered loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Non-covered nonperforming assets totaled $29.1 million at March 31, 2013 and net charge offs were $662,000 for the three months ended March 31, 2013. This compares with nonperforming assets of $32.4 million and net charge offs of $3.4 million at and for the year ended December 31, 2012.

Nonperforming non-covered loans were $19.4 million at March 31, 2013 compared to $21.5 million at December 31, 2012, a $2.1 million decrease. Additions to nonaccrual loans totaled $863,000, primarily attributable to two relationships relating to loans for residential property, totaling $619,000, which are secured by real estate. The remaining increase related primarily to smaller residential property relationships, which are also secured by real estate. There were $745,000 in charge offs taken during the period centered in commercial real estate loans. There were $1.5 million in paydowns during the period. Foreclosures for the period totaled $756,000.

The ratio of the allowance for loan losses to nonperforming assets was 42.07% at March 31, 2013, compared with 39.94% at December 31, 2012. The ratio of allowance for loan losses to total non-covered loans was 2.11% at March 31, 2013, compared with 2.25% at December 31, 2012. The decrease in the allowance for loan losses to total non-covered loans ratio was the result of aggressive charge-offs for non-performing loans and a lesser volume of loans migrating to a non-performing status. This situation has resulted in a stabilization of allowance coverage ratios.

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

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At March 31, 2013 and December 31, 2012, total impaired non-covered loans equaled $20.8 million and $22.4 million, respectively.

 

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

 

              
     March 31, 2013     December 31, 2012  

Nonaccrual loans

   $ 18,963      $ 21,048   

Loans past due 90 days and accruing interest

     465        509   
  

 

 

   

 

 

 

Total nonperforming non-covered loans

     19,428        21,557   

Other real estate owned (OREO) – non-covered

     9,712        10,793   
  

 

 

   

 

 

 

Total nonperforming non-covered assets

   $ 29,140      $ 32,350   
  

 

 

   

 

 

 

Accruing troubled debt restructure loans

   $ 9,640      $ 9,990   

Balances

    

Specific reserve on impaired loans

     2,104        2,656   

General reserve related to unimpaired loans

     10,154        10,264   
  

 

 

   

 

 

 

Total allowance for loan losses

     12,258        12,920   

Average loans during quarter, net of unearned income

     579,635        556,113   

Impaired loans

     20,787        22,365   

Non-impaired loans

     559,020        553,117   
  

 

 

   

 

 

 

Total loans, net of unearned income

     579,807        575,482   

Ratios

    

Allowance for loan losses to loans

     2.11     2.25

Allowance for loan losses to nonperforming assets

     42.07        39.94   

Allowance for loan losses to nonaccrual loans

     64.64        61.38   

General reserve to non-impaired loans

     1.82        1.86   

Nonaccrual loans to loans

     3.27        3.66   

Nonperforming assets to loans and other real estate

     4.94        5.52   

Net charge offs for quarter to average loans, annualized

     0.46        0.60   

The Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At March 31, 2013, the Company had 17 loans that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. Three of these loans were restructured using multiple new loans. The aggregated outstanding principal of TDR loans at March 31, 2013 was $12.4 million, of which $2.7 million were classified as nonaccrual.

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

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

 

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A further breakout of nonaccrual loans, excluding covered loans, at March 31, 2013 and December 31, 2012 is below (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 5,717       $ 5,562   

Commercial

     3,853         5,818   

Construction and land development

     8,772         8,815   

Second mortgages

     141         141   

Multifamily

     —           —    

Agriculture

     234         250   
  

 

 

    

 

 

 

Total real estate loans

     18,717         20,586   

Commercial loans

     161         385   

Consumer installment loans

     85         77   

All other loans

     —          —    
  

 

 

    

 

 

 

Total loans

   $ 18,963       $ 21,048   
  

 

 

    

 

 

 

At March 31, 2013, the Company had 10 construction and land development credit relationships in nonaccrual status. The borrowers for nine of these relationships are residential land developers and the borrower under the remaining relationship is a commercial land developer. All of the relationships are secured by the real estate to be developed, and are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at March 31, 2013 was $8.8 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

There have been no charge-offs related to these relationships during the first three months of 2013. The total amount of the allowance for loan losses attributed to all 10 relationships was $667,000 at March 31, 2013, or 7.6% of the total credit exposure outstanding. The Company establishes its reserves as described above in Allowance for Loan Losses on Non-covered Loans in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 12 months. The Company orders an automated valuation for balances between $100,000 and $250,000 and uses a ratio analysis for balances less than $100,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

Asset Quality – covered assets

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

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

 

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Covered assets that would normally be considered nonperforming except for the accounting requirements regarding purchased impaired loans and other real estate owned covered by the shared loss agreements at March 31, 2013 and December 31, 2012 are as follows (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

Nonaccrual covered loans

   $ 9,639       $ 9,832   

Other real estate owned (OREO) - covered

     2,483         3,370   
  

 

 

    

 

 

 

Total nonperforming covered assets

   $ 12,122       $ 13,202   
  

 

 

    

 

 

 

Capital Requirements

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

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

The Company’s ratio of total risk-based capital was 17.2% at March 31, 2013 compared with 17.0% at December 31, 2012. The tier 1 risk-based capital ratio was 16.0% at March 31, 2013 and 15.8% at December 31, 2012. The Company’s tier 1 leverage ratio was 9.6% at March 31, 2013 and 9.4% at December 31, 2012. All capital ratios exceed regulatory minimums. In the fourth quarter of 2003, BOE issued trust preferred subordinated debt that qualifies as regulatory capital. This trust preferred debt, which has been assumed by the Company, has a 30-year maturity with a 5-year call option and was issued at a rate of three month LIBOR plus 3.0%. The weighted average cost of this instrument was 3.31% during the three months ended March 31, 2013.

The Company issued shares of Series A Preferred Stock to the United States Department of the Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program in December 2008. As of March 31.2013, the Company is current in its payment of dividends with respect to the Series A Preferred Stock.

Liquidity

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

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. At March 31, 2013 and December 31, 2012, the Company’s interest earning assets exceeded its interest bearing liabilities by $81.4 million and $76.1 million, respectively.

 

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Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Bank’s exposure to off-balance sheet and balance sheet risk as of March 31, 2013 and December 31, 2012, is as follows (dollars in thousands):

 

     March 31, 2013      December 31, 2012  

Commitments with off-balance sheet risk:

     

Commitments to extend credit

   $ 70,718       $ 64,056   

Standby letters of credit

     8,879         9,487   
  

 

 

    

 

 

 

Total commitments with off-balance sheet risks

   $ 79,597       $ 73,543   
  

 

 

    

 

 

 

Commitments with balance sheet risk:

     

Loans held for sale

   $ 1,145       $ 1,266   
  

 

 

    

 

 

 

Total commitments with balance sheet risks

     1,145         1,266   
  

 

 

    

 

 

 

Total commitments

   $ 80,742       $ 74,809   
  

 

 

    

 

 

 

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

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

 

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The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and updated monthly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 basis point upward shift and a 200 basis point downward shift in interest rates. A parallel shift in rates over a 12-month period is assumed. The following table represents the change to net interest income given interest rate shocks up and down 100 and 200 basis points at March 31, 2013:

 

     Change in net interest income  
     %     $  

Change in Yield curve

    

+200 bp

     (2.5 )%    $ (1,007

+100 bp

     (1.6     (669

most likely

     0        —     

–100 bp

     (0.3     (1,325

–200 bp

     (1.4     (589

At March 31, 2013, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points over a 12 month period, net interest income could decrease by 2.5%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could decrease by 1.4%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

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

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

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

 

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

Internal Control over Financial Reporting

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

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

As of the date of this report, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit
No.
   Description
  31.1    Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
  31.2    Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
  32.1    Section 1350 Certifications*
101    Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Stockholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

 

* Filed herewith.

 

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SIGNATURES

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

 

    COMMUNITY BANKERS TRUST CORPORATION
    (Registrant)
   

/s/ Rex L. Smith, III

    Rex L. Smith, III
    President and Chief Executive Officer
    (principal executive officer)
Date: May 14, 2013    
   

/s/ Bruce E. Thomas

    Bruce E. Thomas
    Executive Vice President and Chief Financial Officer
    (principal financial officer)
Date: May 14, 2013    

 

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