Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2018.
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO           .

Commission file number:  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)
VIRGINIA
 
54-1284688
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
628 Main Street
 
 
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes
x
No
o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
o
No
x
At July 27, 2018, the Company had 8,711,427 shares of Common Stock outstanding, $1 par value.


AMERICAN NATIONAL BANKSHARES INC.
Index
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
American National Bankshares Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Assets
(Unaudited)
June 30, 2018
 
(*) December 31, 2017
Cash and due from banks
$
24,042

 
$
28,594

Interest-bearing deposits in other banks
9,300

 
23,883

 
 
 
 
Equity securities, at fair value
2,177

 
—

Securities available for sale, at fair value
341,247

 
321,337

Restricted stock, at cost
5,463

 
6,110

Loans held for sale
2,296

 
1,639

 
 
 
 
Loans, net of unearned income
1,339,379

 
1,336,125

Less allowance for loan losses
(13,508
)
 
(13,603
)
Net loans
1,325,871

 
1,322,522

 
 
 
 
Premises and equipment, net
25,879

 
25,901

Other real estate owned, net of valuation allowance of $114 in 2018 and $147 in 2017
1,124

 
1,225

Goodwill
43,872

 
43,872

Core deposit intangibles, net
1,037

 
1,191

Bank owned life insurance
18,674

 
18,460

Accrued interest receivable and other assets
23,549

 
21,344

Total assets
$
1,824,531

 
$
1,816,078

 
 
 
 
Liabilities
 

 
 

Demand deposits -- noninterest bearing
$
420,795

 
$
394,344

Demand deposits -- interest bearing
251,056

 
226,914

Money market deposits
383,963

 
403,024

Savings deposits
132,839

 
126,786

Time deposits
372,093

 
383,658

Total deposits
1,560,746

 
1,534,726

 
 
 
 
Short-term borrowings:
 
 
 
Customer repurchase agreements
6,776

 
10,726

Other short-term borrowings
5,500

 
24,000

Junior subordinated debt
27,876

 
27,826

Accrued interest payable and other liabilities
10,285

 
10,083

Total liabilities
1,611,183

 
1,607,361

 
 
 
 
Shareholders' equity
 

 
 

Preferred stock, $5 par, 2,000,000 shares authorized, none outstanding
—

 
—

Common stock, $1 par, 20,000,000 shares authorized, 8,708,127 shares outstanding at June 30, 2018 and 8,650,547 shares outstanding at December 31, 2017
8,654

 
8,604

Capital in excess of par value
77,496

 
76,179

Retained earnings
135,108

 
127,010

Accumulated other comprehensive loss, net
(7,910
)
 
(3,076
)
Total shareholders' equity
213,348

 
208,717

Total liabilities and shareholders' equity
$
1,824,531

 
$
1,816,078

(*) -  Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.

3


American National Bankshares Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share data) (Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Interest and Dividend Income:
 
 
 
 
 
 
 
Interest and fees on loans
$
14,766

 
$
13,752

 
$
29,423

 
$
26,456

Interest and dividends on securities:
 

 
 

 
 
 
 
Taxable
1,540

 
1,133

 
2,864

 
2,287

Tax-exempt
423

 
509

 
842

 
1,144

Dividends
78

 
84

 
158

 
163

Other interest income
185

 
125

 
373

 
234

Total interest and dividend income
16,992

 
15,603

 
33,660

 
30,284

Interest Expense:
 

 
 

 
 

 
 

Interest on deposits
1,873

 
1,352

 
3,698

 
2,552

Interest on short-term borrowings
2

 
14

 
12

 
42

Interest on long-term borrowings
—

 
81

 
—

 
161

Interest on junior subordinated debt
329

 
244

 
619

 
483

Total interest expense
2,204

 
1,691

 
4,329

 
3,238

Net Interest Income
14,788

 
13,912

 
29,331

 
27,046

Provision for Loan Losses
(30
)
 
350

 
(74
)
 
650

Net Interest Income After Provision for Loan Losses
14,818

 
13,562

 
29,405

 
26,396

Noninterest Income:
 

 
 

 
 

 
 

Trust fees
945

 
908

 
1,874

 
1,820

Service charges on deposit accounts
592

 
607

 
1,204

 
1,196

Other fees and commissions
679

 
627

 
1,321

 
1,234

Mortgage banking income
491

 
462

 
941

 
991

Securities gains, net
289

 
331

 
410

 
590

Brokerage fees
209

 
192

 
431

 
384

Income from Small Business Investment Companies
171

 
6

 
326

 
32

Other
187

 
215

 
389

 
372

Total noninterest income
3,563

 
3,348

 
6,896

 
6,619

Noninterest Expense:
 

 
 

 
 

 
 

Salaries
5,095

 
4,733

 
10,092

 
9,532

Employee benefits
1,111

 
1,061

 
2,286

 
2,181

Occupancy and equipment
1,100

 
1,148

 
2,228

 
2,216

FDIC assessment
132

 
134

 
278

 
263

Bank franchise tax
291

 
263

 
572

 
519

Core deposit intangible amortization
77

 
203

 
154

 
368

Data processing
467

 
502

 
889

 
989

Software
354

 
271

 
659

 
550

Other real estate owned, net
25

 
68

 
55

 
111

Other
2,350

 
2,328

 
4,491

 
4,423

Total noninterest expense
11,002

 
10,711

 
21,704

 
21,152

Income Before Income Taxes
7,379

 
6,199

 
14,597

 
11,863

Income Taxes
1,399

 
1,920

 
2,805

 
3,521

Net Income
$
5,980

 
$
4,279

 
$
11,792

 
$
8,342

 
 
 
 
 
 
 
 

4


Net Income Per Common Share:
 

 
 

 
 

 
 

Basic
$
0.69

 
$
0.50

 
$
1.36

 
$
0.97

Diluted
$
0.69

 
$
0.49

 
$
1.36

 
$
0.96

Average Common Shares Outstanding:
 

 
 

 
 

 
 

Basic
8,692,107

 
8,640,648

 
8,680,739

 
8,636,954

Diluted
8,704,726

 
8,659,165

 
8,695,860

 
8,655,173

The accompanying notes are an integral part of the consolidated financial statements.

5


American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
 
Three Months Ended 
 June 30,
 
2018
 
2017
Net income
$
5,980

 
$
4,279

 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gains (losses) on securities available for sale
(1,446
)
 
879

Tax effect
325

 
(307
)
 
 
 
 
Reclassification adjustment for gains on sales of securities
—

 
(331
)
Tax effect
—

 
116

 
 
 
 
Unrealized losses on cash flow hedges
(237
)
 
—

Tax effect
53

 
—

 
 
 
 
Other comprehensive income (loss)
(1,305
)
 
357

 
 
 
 
Comprehensive income
$
4,675

 
$
4,636

The accompanying notes are an integral part of the consolidated financial statements.
American National Bankshares Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands) (Unaudited)
 
Six Months Ended 
 June 30,
 
2018
 
2017
Net income
$
11,792

 
$
8,342

 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gains (losses) on securities available for sale
(5,180
)
 
1,890

Tax effect
1,186

 
(661
)
 
 
 
 
Reclassification adjustment for gains on sales of securities
(8
)
 
(590
)
Tax effect
2

 
207

 
 
 
 
Unrealized losses on cash flow hedges
(237
)
 
—

Tax effect
53

 
—

 
 
 
 
Other comprehensive income (loss)
(4,184
)
 
846

 
 
 
 
Comprehensive income
$
7,608

 
$
9,188

The accompanying notes are an integral part of the consolidated financial statements.

6



American National Bankshares Inc.
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2018 and 2017
(Dollars in thousands, except per share data) (Unaudited)
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
Balance, December 31, 2016
$
8,578

 
$
75,076

 
$
119,600

 
$
(1,874
)
 
$
201,380

 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
8,342

 
—

 
8,342

 
 
 
 
 
 
 
 
 
 
Other comprehensive income
—

 
—

 
—

 
846

 
846

 
 
 
 
 
 
 
 
 
 
Stock options exercised (3,300 shares)
3

 
70

 
—

 
—

 
73

 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock (6,468 shares)
7

 
(7
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Equity based compensation (21,562 shares)
7

 
552

 
—

 
—

 
559

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.48 per share
—

 
—

 
(4,147
)
 
—

 
(4,147
)
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2017
$
8,595

 
$
75,691

 
$
123,795

 
$
(1,028
)
 
$
207,053

 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
8,604

 
$
76,179

 
$
127,010

 
$
(3,076
)
 
$
208,717

 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
11,792

 
—

 
11,792

 
 
 
 
 
 
 
 
 
 
Other comprehensive loss
—

 
—

 
—

 
(4,184
)
 
(4,184
)
 
 
 
 
 
 
 
 
 
 
Reclassification for ASU 2016-01 adoption
—

 
—

 
650

 
(650
)
 
—

 
 
 
 
 
 
 
 
 
 
Stock options exercised (32,010 shares)
32

 
743

 
—

 
—

 
775

 
 
 
 
 
 
 
 
 
 
Vesting of restricted stock (10,101 shares)
10

 
(10
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Equity based compensation (25,570 shares)
8

 
584

 
—

 
—

 
592

 
 
 
 
 
 
 
 
 
 
Cash dividends paid, $0.50 per share
—

 
—

 
(4,344
)
 
—

 
(4,344
)
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018
$
8,654

 
$
77,496

 
$
135,108

 
$
(7,910
)
 
$
213,348

The accompanying notes are an integral part of the consolidated financial statements.

7

American National Bankshares Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
11,792

 
$
8,342

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

 
 

Provision for loan losses
(74
)
 
650

Depreciation
933

 
913

Net accretion of acquisition accounting adjustments
(804
)
 
(1,029
)
Core deposit intangible amortization
154

 
368

Net amortization of securities
859

 
996

Net gains on sale or call of securities
(8
)
 
(590
)
Unrealized holding gains on equity securities
(402
)
 
—

Gain on sale of loans held for sale
(941
)
 
(774
)
Proceeds from sales of loans held for sale
39,145

 
43,421

Originations of loans held for sale
(38,861
)
 
(39,030
)
Net (gain) loss on other real estate owned
(25
)
 
3

Valuation allowance on other real estate owned
22

 
74

Net gain on sale of premises and equipment
(3
)
 
—

Equity based compensation expense
592

 
559

Earnings on bank owned life insurance
(214
)
 
(218
)
Deferred income tax (benefit) expense
(27
)
 
1,138

Net change in interest receivable
(62
)
 
263

Net change in other assets
(875
)
 
(1,232
)
Net change in interest payable
(2
)
 
(13
)
Net change in other liabilities
(34
)
 
(1,204
)
Net cash provided by operating activities
11,165

 
12,637

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Proceeds from sales of equity securities
431

 
—

Proceeds from sales of securities available for sale
22,066

 
55,403

Proceeds from maturities, calls and paydowns of securities available for sale
16,000

 
26,075

Purchases of securities available for sale
(66,221
)
 
(14,585
)
Net change in restricted stock
647

 
723

Net increase in loans
(2,952
)
 
(123,113
)
Proceeds from sale of premises and equipment
24

 
—

Purchases of premises and equipment
(932
)
 
(1,739
)
Proceeds from sales of other real estate owned
636

 
78

Net cash used in investing activities
(30,301
)
 
(57,158
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net change in demand, money market, and savings deposits
37,585

 
81,875

Net change in time deposits
(11,565
)
 
10,326

Net change in customer repurchase agreements
(3,950
)
 
9,116

Net change in other short-term borrowings
(18,500
)
 
(20,000
)
Common stock dividends paid
(4,344
)
 
(4,147
)
Proceeds from exercise of stock options
775

 
73

Net cash provided by financing activities
1

 
77,243

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(19,135
)
 
32,722

 
 
 
 
Cash and Cash Equivalents at Beginning of Period
52,477

 
53,207

 
 
 
 
Cash and Cash Equivalents at End of Period
$
33,342

 
$
85,929

The accompanying notes are an integral part of the consolidated financial statements.

8



AMERICAN NATIONAL BANKSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Accounting Policies
The consolidated financial statements include the accounts of American National Bankshares Inc. (the "Company") and its wholly owned subsidiary, American National Bank and Trust Company (the "Bank").  The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, unfunded pension liability, other-than-temporary impairment of securities, accounting for merger and acquisition activity, accounting for acquired loans with specific credit-related deterioration, the valuation of deferred tax assets and liabilities, and the valuation of other real estate owned ("OREO").
All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 8.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may occur for any other period.  Certain reclassifications have been made to prior period balances to conform to the current period presentation. These reclassifications did not have an impact on net income and were considered immaterial. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amended the guidance on the classification and measurement of financial instruments. Upon adoption of ASU 2016-01, the Company reclassified $650,000 from accumulated other comprehensive loss to retained earnings for the difference in amortized cost and fair value. In 2018, the Company recognized the equity securities fair value change in net income. Previously, the fair value changes were recognized, net of tax, in other comprehensive loss. The adoption of ASU 2016-01 did not have a material effect on the Company's consolidated financial statements.
During the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers", and all subsequent amendments to the ASU (collectively "ASC 606"), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company's revenue is from interest income, including loans and securities, that are outside the scope of the standard. The services that fall within the scope of the standard are presented within noninterest income on the consolidated statement of income and are recognized as revenue as the Company satisfies its obligations to the customer. The revenue that falls within the scope of ASC 606 is primarily related to service charges on deposit accounts, cardholder and merchant income, wealth advisory services income, other service charges and fees, sales of other real estate, insurance commissions and miscellaneous fees. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted

9


upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company has analyzed all leases currently in place and determined the adoption of ASU 2016-02 will not have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission ("SEC") filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has formed a committee to address the adoption of the standard and engaged a third party vendor to assist with the data gathering and analysis. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-03 to have a material impact on its consolidated financial statements.


10


In June 2018, the FASB issued ASU 2018-07, “Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.
Note 2 – Securities 
The amortized cost and fair value of investments in debt and equity securities at June 30, 2018 and December 31, 2017 were as follows (dollars in thousands):
 
June 30, 2018
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
137,147

 
$
—

 
$
4,302

 
$
132,845

Mortgage-backed and CMOs
110,341

 
145

 
3,014

 
107,472

State and municipal
92,952

 
706

 
656

 
93,002

Corporate
7,826

 
131

 
29

 
7,928

Total securities available for sale
$
348,266

 
$
982

 
$
8,001

 
$
341,247

The Company adopted ASU 2016-01 effective January 1, 2018 and had equity securities with a fair value of $2,177,000 at June 30, 2018 and recognized in income $402,000 of unrealized holding gains in the first six months of 2018. During the six months ended June 30, 2018, the Company sold $431,000 in equity securities at fair value.
 
December 31, 2017
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
 
Fair Value
Securities available for sale:
 
 
 
 
 
 
 
Federal agencies and GSEs
$
114,246

 
$
8

 
$
2,127

 
$
112,127

Mortgage-backed and CMOs
106,163

 
293

 
1,140

 
105,316

State and municipal
92,711

 
1,262

 
347

 
93,626

Corporate
7,842

 
234

 
14

 
8,062

Equity securities
1,383

 
823

 
—

 
2,206

Total securities available for sale
$
322,345

 
$
2,620

 
$
3,628

 
$
321,337

Restricted Stock
Due to restrictions placed upon the Bank's common stock investment in the Federal Reserve Bank of Richmond ("FRB") and Federal Home Loan Bank of Atlanta ("FHLB"), these securities have been classified as restricted equity securities and carried at cost.  The restricted securities are not subject to the investment security classification and are included as a separate line item on the Company's consolidated balance sheets.  The FRB requires the Bank to maintain stock with a par value equal to 3.00% of its outstanding capital and an additional 3.00% is on call.  The FHLB requires the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank's total assets. The cost of restricted stock at June 30, 2018 and December 31, 2017 was as follows (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
FRB stock
$
3,603

 
$
3,587

FHLB stock
1,860

 
2,523

Total restricted stock
$
5,463

 
$
6,110

Temporarily Impaired Securities
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2018.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.

11


Available for sale securities that have been in a continuous unrealized loss position are as follows (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
127,846

 
$
4,302

 
$
75,470

 
$
1,206

 
$
52,376

 
$
3,096

Mortgage-backed and CMOs
99,504

 
3,014

 
75,725

 
1,887

 
23,779

 
1,127

State and municipal
46,908

 
656

 
39,967

 
320

 
6,941

 
336

Corporate
1,497

 
29

 
481

 
19

 
1,016

 
10

Total
$
275,755

 
$
8,001

 
$
191,643

 
$
3,432

 
$
84,112

 
$
4,569

Federal agencies and GSEs: The unrealized losses on the Company's investment in 28 government sponsored entities ("GSE") securities were caused by interest rate increases. Twelve of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018.
Mortgage-backed securities: The unrealized losses on the Company's investment in 65 GSE mortgage-backed securities were caused by interest rate increases. Seventeen of these securities were in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018.
Collateralized Mortgage Obligations: The unrealized losses associated with three private GSE collateralized mortgage obligations ("CMO") were due to normal market fluctuations. One of these securities was in an unrealized loss position for 12 months or more. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company's investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018.
State and municipal securities:  The unrealized losses on 66 state and municipal securities were caused by interest rate increases. Eleven of these securities were in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018.
Corporate securities:  The unrealized losses on two corporate securities were caused by interest rate increases. One of these securities was in an unrealized loss position for 12 months or more. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018.
Restricted stock: When evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider restricted stock to be other-than-temporarily impaired at June 30, 2018, and no impairment has been recognized.

12


The table below shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2017 (dollars in thousands):
 
Total
 
Less than 12 Months
 
12 Months or More
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Federal agencies and GSEs
$
99,133

 
$
2,127

 
$
45,474

 
$
321

 
$
53,659

 
$
1,806

Mortgage-backed and CMOs
90,806

 
1,140

 
64,449

 
533

 
26,357

 
607

State and municipal
34,550

 
347

 
27,442

 
159

 
7,108

 
188

Corporate
1,529

 
14

 
495

 
5

 
1,034

 
9

Total
$
226,018

 
$
3,628

 
$
137,860

 
$
1,018

 
$
88,158

 
$
2,610

Other-Than-Temporarily-Impaired Securities 
As of June 30, 2018 and December 31, 2017, there were no securities classified as other-than-temporarily impaired.
Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities available for sale during the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Realized gains (losses):
 
 
 
Gross realized gains
$
—

 
$
105

Gross realized losses
—

 
(97
)
Net realized gains
$
—

 
$
8

Proceeds from sales of securities
$
—

 
$
22,066

 
 
 
 
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Realized gains (losses):
 
 
 
Gross realized gains
$
341

 
$
605

Gross realized losses
(10
)
 
(15
)
Net realized gains
$
331

 
$
590

Proceeds from sales of securities
$
13,884

 
$
55,403

Note 3 – Loans
Loans, excluding loans held for sale, at June 30, 2018 and December 31, 2017, were comprised of the following (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Commercial
$
291,454

 
$
251,666

Commercial real estate:
 

 
 

Construction and land development
96,740

 
123,147

Commercial real estate
633,128

 
637,701

Residential real estate:
 

 
 

Residential
207,374

 
209,326

Home equity
105,558

 
109,857

Consumer
5,125

 
4,428

Total loans
$
1,339,379

 
$
1,336,125


13


Acquired Loans 
The outstanding principal balance and the carrying amount of these loans, including FASB Accounting Standards Codification ("ASC") 310-30, included in the consolidated balance sheets at June 30, 2018 and December 31, 2017 are as follows (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Outstanding principal balance
$
70,321

 
$
79,523

Carrying amount
65,136

 
73,796

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies ASC 310-30 to account for interest earned, as of the indicated dates are as follows (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Outstanding principal balance
$
25,839

 
$
27,876

Carrying amount
21,720

 
23,430

The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, for the six months ended June 30, 2018 and the year ended December 31, 2017 (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Balance at January 1
$
4,890

 
$
6,103

Accretion
(1,348
)
 
(3,117
)
Reclassification from nonaccretable difference
478

 
1,006

Other changes, net*
1,192

 
898

 
$
5,212

 
$
4,890

* This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate acquired impaired loans, and discounted payoffs that occurred in the period.
Past Due Loans
The following table shows an analysis by portfolio segment of the Company's past due loans at June 30, 2018 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
75

 
$
—

 
$
—

 
$
526

 
$
601

 
$
290,853

 
$
291,454

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
—

 
—

 
—

 
33

 
33

 
96,707

 
96,740

Commercial real estate
48

 
30

 
—

 
228

 
306

 
632,822

 
633,128

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
257

 
—

 
229

 
941

 
1,427

 
205,947

 
207,374

Home equity
55

 
—

 
—

 
133

 
188

 
105,370

 
105,558

Consumer
32

 
—

 
—

 
—

 
32

 
5,093

 
5,125

Total
$
467

 
$
30

 
$
229

 
$
1,861

 
$
2,587

 
$
1,336,792

 
$
1,339,379


14


The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2017 (dollars in thousands):
 
30- 59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days +
Past Due
and Still
Accruing
 
Non-
Accrual
Loans
 
Total
Past
Due
 
Current
 
Total
Loans
Commercial
$
92

 
$
—

 
$
—

 
$
90

 
$
182

 
$
251,484

 
$
251,666

Commercial real estate:
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
—

 
—

 
—

 
36

 
36

 
123,111

 
123,147

Commercial real estate
86

 
—

 
280

 
489

 
855

 
636,846

 
637,701

Residential:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential
282

 
71

 
79

 
1,343

 
1,775

 
207,551

 
209,326

Home equity
141

 
16

 
—

 
243

 
400

 
109,457

 
109,857

Consumer
21

 
5

 
—

 
—

 
26

 
4,402

 
4,428

Total
$
622

 
$
92

 
$
359

 
$
2,201

 
$
3,274

 
$
1,332,851

 
$
1,336,125


15


Impaired Loans
The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at June 30, 2018 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
159

 
$
158

 
$
—

 
$
161

 
$
6

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
—

 
—

 
—

 
—

 
—

Commercial real estate
516

 
513

 
—

 
612

 
19

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,142

 
1,144

 
—

 
1,023

 
14

Home equity
158

 
158

 
—

 
147

 
6

Consumer
—

 
—

 
—

 
5

 
—

 
$
1,975

 
$
1,973

 
$
—

 
$
1,948

 
$
45

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial
$
387

 
$
384

 
$
196

 
$
435

 
$
9

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development*
33

 
34

 
—

 
35

 
—

Commercial real estate*
28

 
28

 
—

 
30

 
—

Residential
 

 
 

 
 

 
 

 
 

Residential
182

 
181

 
12

 
465

 
5

Home equity*
132

 
135

 
—

 
200

 
1

Consumer*
—

 
—

 
—

 
—

 
—

 
$
762

 
$
762

 
$
208

 
$
1,165

 
$
15

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
546

 
$
542

 
$
196

 
$
596

 
$
15

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
33

 
34

 
—

 
35

 
—

Commercial real estate
544

 
541

 
—

 
642

 
19

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,324

 
1,325

 
12

 
1,488

 
19

Home equity
290

 
293

 
—

 
347

 
7

Consumer
—

 
—

 
—

 
5

 
—

 
$
2,737

 
$
2,735

 
$
208

 
$
3,113

 
$
60

* Allowance is reported as zero in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans where unearned costs exceed unearned fees.

16


The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2017 (dollars in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
$
4

 
$
4

 
$
—

 
$
19

 
$
1

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
—

 
—

 
—

 
56

 
4

Commercial real estate
791

 
789

 
—

 
1,069

 
66

Residential:
 

 
 

 
 

 
 

 
 

Residential
717

 
719

 
—

 
575

 
41

Home equity
142

 
142

 
—

 
109

 
10

Consumer
5

 
5

 
—

 
6

 
1

 
$
1,659

 
$
1,659

 
$
—

 
$
1,834

 
$
123

With a related allowance recorded:
 

 
 

 
 

 
 

 
 

Commercial
$
202

 
$
201

 
$
154

 
$
150

 
$
16

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development*
37

 
37

 
—

 
56

 
—

Commercial real estate*
34

 
32

 
—

 
126

 
11

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,022

 
1,022

 
12

 
1,174

 
27

Home equity
263

 
261

 
1

 
251

 
1

Consumer*
—

 
—

 
—

 
5

 
—

 
$
1,558

 
$
1,553

 
$
167

 
$
1,762

 
$
55

Total:
 

 
 

 
 

 
 

 
 

Commercial
$
206

 
$
205

 
$
154

 
$
169

 
$
17

Commercial real estate:
 

 
 

 
 

 
 

 
 

Construction and land development
37

 
37

 
—

 
112

 
4

Commercial real estate
825

 
821

 
—

 
1,195

 
77

Residential:
 

 
 

 
 

 
 

 
 

Residential
1,739

 
1,741

 
12

 
1,749

 
68

Home equity
405

 
403

 
1

 
360

 
11

Consumer
5

 
5

 
—

 
11

 
1

 
$
3,217

 
$
3,212

 
$
167

 
$
3,596

 
$
178

* Allowance is reported as zero in the table due to presentation in thousands and rounding.
In the table above, recorded investment may exceed unpaid principal balance due to acquired loans with a premium and loans where unearned costs exceed unearned fees.


17


The following tables show the detail of loans modified as troubled debt restructurings ("TDRs") during the three and six months ended June 30, 2018 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended June 30, 2018
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
—

 
$
—

 
$
—

Commercial real estate
 
—

 
—

 
—

Construction and land development
 
—

 
—

 
—

Home Equity
 
—

 
—

 
—

Residential real estate
 
—

 
—

 
—

Consumer
 
—

 
—

 
—

Total
 
—

 
$
—

 
$
—

 
 
Loans Modified as a TDR for the
 
 
Six Months Ended June 30, 2018
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
—

 
$
—

 
$
—

Commercial real estate
 
—

 
—

 
—

Construction and land development
 
—

 
—

 
—

Home Equity
 
—

 
—

 
—

Residential real estate
 
1

 
11

 
11

Consumer
 
—

 
—

 
—

Total
 
1

 
$
11

 
$
11


18


The following tables show the detail of loans modified as TDRs during the three and six months ended June 30, 2017 included in the impaired loan balances (dollars in thousands):
 
 
Loans Modified as a TDR for the
 
 
Three Months Ended June 30, 2017
Loan Type
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Commercial
 
1