UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                  to

Commission File Number: 001‑32590

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	20‑2652949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
9954 Mayland Drive, Suite 2100
Richmond, Virginia	23233
(Address of principal executive offices)	(Zip Code)
(804) 934‑9999 (Registrant’s telephone number, including area code)
n/a (Former name, former address and former fiscal year, if changed since last report)

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

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 par value	ESXB	The NASDAQ Stock Market, LLC

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

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

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

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☑
		Emerging growth company	☐

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

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

At September 30, 2019, there were 22,335,411 shares of the Company’s common stock outstanding.

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10‑Q

September 30, 2019

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	45
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3. Defaults upon Senior Securities	46
Item 4. Mine Safety Disclosures	46
Item 5. Other Information	46
Item 6. Exhibits	46
SIGNATURES	47

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(dollars in thousands, except per share data)

	September 30, 2019		December 31, 2018*
ASSETS
Cash and due from banks	$	23,056	$	18,292
Interest bearing bank deposits		13,742		15,927
Total cash and cash equivalents		36,798		34,219
Securities available for sale, at fair value		190,159		206,726
Securities held to maturity, at cost (fair value of $39,131 and $42,253, respectively)		38,213		42,108
Equity securities, restricted, at cost		8,929		7,800
Total securities		237,301		256,634
Loans held for sale		—		146
Loans		1,034,522		993,705
Purchased credit impaired (PCI) loans		33,958		38,285
Total loans		1,068,480		1,031,990
Allowance for loan losses (loans of $8,393 and $8,983, respectively; PCI loans of $156 and $156, respectively)		(8,549)		(9,139)
Net loans		1,059,931		1,022,851
Bank premises and equipment, net		29,713		31,488
Bank premises and equipment held for sale		1,589		1,252
Leased assets		6,709		—
Other real estate owned		4,740		1,099
Bank owned life insurance		29,161		28,834
Other assets		16,739		16,627
Total assets	$	1,422,681	$	1,393,150
LIABILITIES
Deposits:
Noninterest bearing	$	183,000	$	165,086
Interest bearing		994,241		999,889
Total deposits		1,177,241		1,164,975
Federal funds purchased		71		19,440
Federal Home Loan Bank borrowings		73,667		59,447
Trust preferred capital notes		4,124		4,124
Lease liabilities		6,967		—
Other liabilities		7,973		7,703
Total liabilities		1,270,043		1,255,689
SHAREHOLDERS’ EQUITY
Common stock  (200,000,000 shares authorized, $0.01 par value; 22,335,411 and 22,132,304 shares issued and outstanding, respectively)		223		221
Additional paid in capital		150,264		148,763
Retained deficit		(586)		(10,244)
Accumulated other comprehensive income (loss)		2,737		(1,279)
Total shareholders’ equity		152,638		137,461
Total liabilities and shareholders’ equity	$	1,422,681	$	1,393,150

*Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements

3

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest and dividend income
Interest and fees on loans	$	13,187	$	11,893	$	38,246	$	34,122
Interest and fees on PCI loans		2,333		1,265		4,877		3,937
Interest on federal funds sold		9		—		14		1
Interest on deposits in other banks		87		94		300		203
Interest and dividends on securities
Taxable		1,489		1,364		4,483		3,816
Nontaxable		355		528		1,252		1,654
Total interest and dividend income		17,460		15,144		49,172		43,733
Interest expense
Interest on deposits		3,698		2,699		10,521		7,197
Interest on borrowed funds		343		465		1,107		1,442
Total interest expense		4,041		3,164		11,628		8,639
Net interest income		13,419		11,980		37,544		35,094
Provision for loan losses		—		—		125		—
Net interest income after provision for loan losses		13,419		11,980		37,419		35,094
Noninterest income
Service charges and fees		758		626		2,074		1,818
Gain on securities transactions, net		50		68		274		82
Gain on sale of other loans		—		65		—		118
Income on bank owned life insurance		181		184		546		551
Mortgage loan income		176		97		338		288
Other		346		171		744		522
Total noninterest income		1,511		1,211		3,976		3,379
Noninterest expense
Salaries and employee benefits		5,289		5,029		15,943		15,897
Occupancy expenses		813		780		2,662		2,361
Equipment expenses		377		366		1,152		1,024
FDIC assessment		4		195		316		599
Data processing fees		594		482		1,741		1,467
Other real estate expense, net		565		63		662		158
Other operating expenses		1,588		1,376		4,585		4,338
Total noninterest expense		9,230		8,291		27,061		25,844
Income before income taxes		5,700		4,900		14,334		12,629
Income tax expense		1,087		945		2,674		2,298
Net income	$	4,613	$	3,955	$	11,660	$	10,331
Net income per share — basic	$	0.21	$	0.18	$	0.52	$	0.47
Net income per share — diluted	$	0.20	$	0.17	$	0.52	$	0.46
Weighted average number of shares outstanding
Basic		22,303		22,115		22,224		22,095
Diluted		22,561		22,627		22,475		22,576

See accompanying notes to unaudited consolidated financial statements

4

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(dollars in thousands)

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Net income	$	4,613	$	3,955	$	11,660	$	10,331
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Change in unrealized gain (loss) on investment securities		1,215		(1,240)		5,818		(4,393)
Tax related to unrealized (gain) loss on investment securities		(267)		272		(1,279)		965
Reclassification adjustment for gain on securities sold		(50)		(68)		(274)		(82)
Tax related to realized gain on securities sold		11		15		60		18
Cash flow hedge:
Change in unrealized (loss) gain on cash flow hedge		(156)		(35)		(395)		177
Tax related to cash flow hedge		34		8		86		(39)
Total other comprehensive income (loss)		787		(1,048)		4,016		(3,354)
Total comprehensive income	$	5,400	$	2,907	$	15,676	$	6,977

See accompanying notes to unaudited consolidated financial statements

5

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(dollars and shares in thousands)

								Accumulated
				Additional				Other
	Common Stock			Paid in		Retained		Comprehensive
	Shares	Amount		Capital		Deficit		Income (Loss)		Total
Balance June 30, 2019	22,258	$	223	$	149,752	$	(4,529)	$	1,950	$	147,396
Issuance of common stock	7		—		54		—		—		54
Exercise and issuance of employee stock options	70		—		458		—		—		458
Net income	—		—		—		4,613		—		4,613
Dividends paid on common stock ($0.03 per share)	—		—		—		(670)		—		(670)
Other comprehensive income	—		—		—		—		787		787
Balance September 30, 2019	22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638
Balance January 1, 2019	22,132	$	221	$	148,763	$	(10,244)	$	(1,279)	$	137,461
Issuance of common stock	21		—		161		—		—		161
Exercise and issuance of employee stock options	182		2		1,340		—		—		1,342
Net income	—		—		—		11,660		—		11,660
Dividends paid on common stock ($0.09 per share)	—		—		—		(2,002)		—		(2,002)
Other comprehensive income	—		—		—		—		4,016		4,016
Balance September 30, 2019	22,335	$	223	$	150,264	$	(586)	$	2,737	$	152,638
Balance June 30, 2018	22,111	$	221	$	148,242	$	(17,556)	$	(2,263)	$	128,644
Issuance of common stock	6		—		48		—		—		48
Exercise and issuance of employee stock options	4		—		204		—		—		204
Net income	—		—		—		3,955		—		3,955
Other comprehensive loss	—		—		—		—		(1,048)		(1,048)
Balance September 30, 2018	22,121	$	221	$	148,494	$	(13,601)	$	(3,311)	$	131,803
Balance January 1, 2018	22,073	$	221	$	147,671	$	(23,932)	$	43	$	124,003
Issuance of common stock	13		—		122		—		—		122
Exercise and issuance of employee stock options	35		—		701		—		—		701
Net income	—		—		—		10,331		—		10,331
Other comprehensive loss	—		—		—		—		(3,354)		(3,354)
Balance September 30, 2018	22,121	$	221	$	148,494	$	(13,601)	$	(3,311)	$	131,803

See accompanying notes to unaudited consolidated financial statements

6

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(dollars in thousands)

	September 30, 2019		September 30, 2018
Operating activities:
Net income	$	11,660	$	10,331
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,552		1,461
Leased asset amortization		699		—
Stock-based compensation expense		804		709
Tax benefit of exercised stock options		(150)		(43)
Amortization of purchased loan premium		236		195
Deferred tax expense		—		—
Provision for loan losses		125		—
Amortization of security premiums and accretion of discounts, net		905		1,215
Net gain on sale of securities		(274)		(82)
Net (gain) loss on sale and valuation of other real estate owned		(81)		21
Net gain on sale of loans		—		(118)
Originations of mortgages held for sale		(13,227)		(872)
Proceeds from sales of mortgages held for sale		13,373		872
Increase in bank owned life insurance investment		(327)		(551)
Changes in assets and liabilities:
Increase in other assets		(661)		(912)
(Decrease) increase in accrued expenses and other liabilities		(117)		763
Net cash provided by operating activities		14,517		12,989
Investing activities:
Proceeds from sales/calls/maturities/paydowns of available for sale securities		75,128		31,397
Proceeds from calls/maturities/paydowns of held to maturity securities		3,835		2,504
Proceeds from sales of restricted equity securities		866		1,828
Purchase of available for sale securities		(53,589)		(32,691)
Purchase of restricted equity securities		(1,995)		(419)
Proceeds from sale of other real estate owned		638		1,434
Net increase in loans		(42,707)		(21,782)
Principal recoveries of loans previously charged off		363		418
Purchase of premises and equipment, net		(121)		(4,297)
Purchase small business investment company fund investment		(875)		(420)
Proceeds from sale of loans		705		5,635
Net cash used in investing activities		(17,752)		(16,393)
Financing activities:
Net increase in deposits		12,267		38,124
Net (decrease) increase in federal funds purchased		(19,369)		5,151
Net increase (decrease) in short-term Federal Home Loan Bank borrowings		5,000		(26,500)
Proceeds from long-term Federal Home Loan Bank borrowings		10,137		—
Payments on long-term Federal Home Loan Bank borrowings		(917)		(11,109)
Proceeds from issuance of common stock		698		115
Cash dividends paid		(2,002)		—
Net cash provided by financing activities		5,814		5,781
Net increase in cash and cash equivalents		2,579		2,377
Cash and cash equivalents:
Beginning of the period		34,219		21,958
End of the period	$	36,798	$	24,335
Supplemental disclosures of cash flow information:
Interest paid	$	11,554	$	8,193
Income taxes paid		2,195		2,234
Transfers of loans to other real estate owned		4,198		396
Transfers of building premises and equipment to held for sale		337		1,252

See accompanying notes to unaudited consolidated financial statements

7

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates two loan production offices.

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

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, 2018. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of September 30, 2019, the statements of income and comprehensive income and changes in shareholders’ equity for the three and nine months ended September 30, 2019, and the statements of cash flows for the nine months ended September 30, 2019. Results for the nine month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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

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

Certain reclassifications have been made to prior period balances to conform to the current year presentations. Such reclassifications had no impact on net income or shareholders’ equity.

8

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	September 30, 2019
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	7,991	$	—	$	(34)	$	7,957
U.S. Government agencies		23,098		75		(218)		22,955
State, county and municipal		90,806		3,885		(21)		94,670
Mortgage backed securities		46,798		1,120		(124)		47,794
Asset backed securities		10,703		49		(44)		10,708
Corporate bonds		6,011		67		(3)		6,075
Total Securities Available for Sale	$	185,407	$	5,196	$	(444)	$	190,159
Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(36)	$	9,964
State, county and municipal		28,213		956		(2)		29,167
Total Securities Held to Maturity	$	38,213	$	956	$	(38)	$	39,131

	December 31, 2018
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury securities	$	13,460	$	—	$	(336)	$	13,124
U.S. Government agencies		24,689		71		(151)		24,609
State, county and municipal		112,465		1,018		(941)		112,542
Mortgage backed securities		46,877		196		(656)		46,417
Asset backed securities		5,342		73		(4)		5,411
Corporate bonds		4,685		—		(62)		4,623
Total Securities Available for Sale	$	207,518	$	1,358	$	(2,150)	$	206,726
Securities Held to Maturity
U.S. Government agencies	$	10,000	$	—	$	(210)	$	9,790
State, county and municipal		32,108		419		(64)		32,463
Total Securities Held to Maturity	$	42,108	$	419	$	(274)	$	42,253

The amortized cost and fair value of securities at September 30, 2019 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	13,577	$	13,557	$	20,456	$	20,514
Due after one year through five years		16,728		17,374		71,763		72,693
Due after five years through ten years		7,427		7,674		76,111		79,244
Due after ten years		481		526		17,077		17,708
Total securities	$	38,213	$	39,131	$	185,407	$	190,159

9

Proceeds from sales and calls of securities were $16.4 million and $8.4 million during the three months ended September 30, 2019 and 2018, respectively, and $57.5 million and $24.2 million for the nine months ended September 30, 2019 and 2018, respectively. Gains and losses on securities transactions are determined using the specific identification method. Gross realized gains and losses on securities transactions during the three and nine months ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Gross realized gains	$	87	$	93	$	504	$	161
Gross realized losses		(37)		(25)		(230)		(79)
Net securities (loss) gain	$	50	$	68	$	274	$	82

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three and nine months ended September 30, 2019 and 2018.

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	September 30, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	—	$	—	$	7,957	$	(34)	$	7,957	$	(34)
U.S. Government agencies		7,516		(103)		7,051		(115)		14,567		(218)
State, county and municipal		568		(9)		618		(12)		1,186		(21)
Mortgage backed securities		8,916		(43)		5,989		(81)		14,905		(124)
Asset backed securities		5,602		(40)		654		(4)		6,256		(44)
Corporate bonds		998		(3)		—		—		998		(3)
Total	$	23,600	$	(198)	$	22,269	$	(246)	$	45,869	$	(444)
Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,964	$	(36)	$	9,964	$	(36)
State, county and municipal		594		(1)		625		(1)		1,219		(2)
Total	$	594	$	(1)	$	10,589	$	(37)	$	11,183	$	(38)

	December 31, 2018
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available for Sale
U.S. Treasury securities	$	1,480	$	(1)	$	11,644	$	(335)	$	13,124	$	(336)
U.S. Government agencies		6,959		(47)		5,155		(104)		12,114		(151)
State, county and municipal		7,918		(81)		34,540		(860)		42,458		(941)
Mortgage backed securities		11,513		(94)		15,811		(562)		27,324		(656)
Asset backed securities		537		(1)		294		(3)		831		(4)
Corporate bonds		3,661		(47)		236		(15)		3,897		(62)
Total	$	32,068	$	(271)	$	67,680	$	(1,879)	$	99,748	$	(2,150)
Securities Held to Maturity
U.S. Government agencies	$	—	$	—	$	9,790	$	(210)	$	9,790	$	(210)
State, county and municipal		2,452		(20)		3,985		(44)		6,437		(64)
Total	$	2,452	$	(20)	$	13,775	$	(254)	$	16,227	$	(274)

10

The unrealized losses (impairments) in the investment portfolio at September 30, 2019 and December 31, 2018 are generally a result of market fluctuations of interest rates that occur daily. Interest rates increased consistently across the United States Treasury security yield curve during 2018, thereby increasing unrealized losses on securities.  Likewise, these interest rates consistently decreased during 2019, thereby decreasing unrealized losses on the Company’s securities. The unrealized losses are from 53 securities at September 30, 2019. Of those, 46 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. Five investment grade asset-backed securities comprised of student loan pools included in corporate obligations and two corporate bonds make up the remaining securities with unrealized losses at September 30, 2019. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

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

Securities with amortized costs of $46.2million and $56.0 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits as required or permitted by law. Securities with amortized costs of $6.5 million and $7.0 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure lines of credit at the Federal Reserve discount window. At each of September 30, 2019 and December 31, 2018, there were no securities purchased from a single issuer, other than U.S. Treasury securities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at September 30, 2019 and December 31, 2018 were comprised of the following (dollars in thousands):

	September 30, 2019				December 31, 2018
	Amount		% of Loans		Amount		% of Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	222,003	21.46	%	$	216,268	21.77	%
Commercial		393,064	38.00			379,904	38.23
Construction and land development		130,977	12.66			120,413	12.12
Second mortgages		6,384	0.62			6,778	0.68
Multifamily		73,774	7.13			59,557	5.99
Agriculture		9,457	0.91			8,370	0.84
Total real estate loans		835,659	80.78			791,290	79.63
Commercial loans		185,999	17.98			188,722	18.99
Consumer installment loans		11,883	1.15			12,048	1.21
All other loans		981	0.09			1,645	0.17
Total loans	$	1,034,522	100.00	%	$	993,705	100.00	%

The Company held $14.9 and $17.4 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at September 30, 2019 and December 31, 2018, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $1.2 million at each of September 30, 2019 and December 31, 2018, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method.   Any unamortized purchase premium remaining on loans prepaid by the borrower is written off. 

At September 30, 2019 and December 31, 2018, the Company’s allowance for loan losses was comprised of the following: (i) a specific valuation component calculated in accordance with Financial Accounting Standards Board

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(FASB) Accounting Standards Codification (ASC) 310, Receivables, (ii) a general valuation component calculated in accordance with FASB ASC 450, Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

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

							Three months ended				Nine months ended
	September 30, 2019						September 30, 2019				September 30, 2019
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Rcognized		Investment		Rcognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,506	$	1,861	$	—	$	1,514	$	11	$	1,534	$	32
Commercial		3,286		4,000		—		3,308		35		3,372		103
Construction and land development		329		329		—		164		—		82		—
Multifamily		2,494		2,494		—		2,510		—		2,533		—
Total real estate loans		7,615		8,684		—		7,496		46		7,521		135
Subtotal impaired loans with no valuation allowance		7,615		8,684		—		7,496		46		7,521		135
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		1,462		1,786		350		1,862		12		1,965		36
Commercial		396		883		84		552		2		847		6
Construction and land development		77		177		16		2,084		—		3,210		—
Total real estate loans		1,935		2,846		450		4,498		14		6,022		42
Commercial loans		847		852		469		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Subtotal impaired loans with a valuation allowance		2,789		3,705		920		5,584		18		7,645		55
Total:
Mortgage loans on real estate:
Residential 1‑4 family		2,968		3,647		350		3,376		23		3,499		68
Commercial		3,682		4,883		84		3,860		37		4,219		109
Construction and land development		406		506		16		2,248		—		3,292		—
Multifamily		2,494		2,494		—		2,510		—		2,533		—
Total real estate loans		9,550		11,530		450		11,994		60		13,543		177
Commercial loans		847		852		469		1,080		4		1,618		13
Consumer installment loans		7		7		1		6		—		5		—
Total impaired loans	$	10,404	$	12,389	$	920	$	13,080	$	64	$	15,166	$	190

⁽¹⁾ The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.

⁽²⁾ The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances.

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The following table summarizes information related to impaired loans as of December 31, 2018 and for the three and nine months ended September 30, 2018 (dollars in thousands):

							Three months ended				Nine months ended
	December 31, 2018						September 30, 2018				September 30, 2018
			Unpaid
	Recorded		Principal		Related		Average		Interest		Average		Interest
	Investment (1)		Balance (2)		Allowance		Investment		Rcognized		Investment		Rcognized
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family	$	1,563	$	1,890	$	—	$	1,716	$	11	$	1,802	$	33
Commercial		3,502		4,176		—		3,561		38		3,702		112
Construction and land development		—		—		—		426		—		318		—
Multifamily		2,559		2,559		—		2,559		31		1,279		92
Total real estate loans		7,624		8,625		—		8,262		80		7,101		237
Commercial loans		—		—		—		136		—		589		—
Subtotal impaired loans with no valuation allowance		7,624		8,625		—		8,398		80		7,690		237
With an allowance recorded:
Mortgage loans on real estate:
Residential 1‑4 family		2,131		2,538		349		2,298		20		2,266		57
Commercial		1,550		2,034		482		1,600		4		1,063		13
Construction and land development		4,571		5,840		515		4,471		—		4,589		—
Agriculture		—		—		—		—		—		34		—
Total real estate loans		8,252		10,412		1,346		8,369		24		7,952		70
Commercial loans		1,983		1,991		900		478		1		383		3
Consumer installment loans		—		—		—		3		—		4		—
Subtotal impaired loans with a valuation allowance		10,235		12,403		2,246		8,850		25		8,339		73
Total:
Mortgage loans on real estate:
Residential 1‑4 family		3,694		4,428		349		4,014		31		4,068		90
Commercial		5,052		6,210		482		5,161		42		4,765		125
Construction and land development		4,571		5,840		515		4,897		—		4,907		—
Multifamily		2,559		2,559		—		2,559		31		1,279		92
Agriculture		—		—		—		—		—		34		—
Total real estate loans		15,876		19,037		1,346		16,631		104		15,053		307
Commercial loans		1,983		1,991		900		614		1		972		3
Consumer installment loans		—		—		—		3		—		4		—
Total impaired loans	$	17,859	$	21,028	$	2,246	$	17,248	$	105	$	16,029	$	310

⁽¹⁾ The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.

⁽²⁾ The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowances.

Troubled debt restructures still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at September 30, 2019 and December 31, 2018, is set forth in the table below (dollars in thousands):

	September 30, 2019		December 31, 2018
Nonaccruals	$	5,746	$	9,500
Trouble debt restructure and still accruing		4,658		8,359
Total impaired	$	10,404	$	17,859

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three and nine months ended September 30, 2019 and 2018. For the three months ended September 30, 2019 and 2018, estimated interest income of $92,000 and $167,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. For the nine months ended September 30, 2019 and 2018, estimated interest income of $284,000 and $471,000,  

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respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

There were no loans greater than 90 days past due and still accruing interest at each of September 30, 2019 and December 31, 2018. The following tables present an age analysis of past due status of loans by category as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019
	30‑89 Days				Total Past				Total Loans
	Past Due		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	1,141	$	1,349	$	2,490	$	219,513	$	222,003
Commercial		107		1,059		1,166		391,898		393,064
Construction and land development		—		406		406		130,571		130,977
Second mortgages		229		—		229		6,155		6,384
Multifamily		—		2,494		2,494		71,280		73,774
Agriculture		50		—		50		9,407		9,457
Total real estate loans		1,527		5,308		6,835		828,824		835,659
Commercial loans		—		431		431		185,568		185,999
Consumer installment loans		13		7		20		11,863		11,883
All other loans		—		—		—		981		981
Total loans	$	1,540	$	5,746	$	7,286	$	1,027,236	$	1,034,522

	December 31, 2018
	30‑89 Days				Total Past				Total Loans
	Past Due		Nonaccrual		Due		Current		Receivable
Mortgage loans on real estate:
Residential 1‑4 family	$	495	$	1,257	$	1,752	$	214,516	$	216,268
Commercial		551		2,123		2,674		377,230		379,904
Construction and land development		59		4,571		4,630		115,783		120,413
Second mortgages		—		—		—		6,778		6,778
Multifamily		2,559		—		2,559		56,998		59,557
Agriculture		—		—		—		8,370		8,370
Total real estate loans		3,664		7,951		11,615		779,675		791,290
Commercial loans		80		1,549		1,629		187,093		188,722
Consumer installment loans		10		—		10		12,038		12,048
All other loans		—		—		—		1,645		1,645
Total loans	$	3,754	$	9,500	$	13,254	$	980,451	$	993,705

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Activity in the allowance for loan losses on loans by segment for the three and nine months ended September 30, 2019 and 2018 is presented in the following tables (dollars in thousands):

	Three Months Ended September 30, 2019
			Provision
	June 30, 2019		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,894	$	(35)	$	(144)	$	26	$	2,741
Commercial		2,026		1		—		7		2,034
Construction and land development		1,399		(587)		(200)		18		630
Second mortgages		81		(7)		—		2		76
Multifamily		192		17		—		41		250
Agriculture		32		15		—		—		47
Total real estate loans		6,624		(596)		(344)		94		5,778
Commercial loans		1,999		(229)		(98)		3		1,675
Consumer installment loans		185		32		(134)		53		136
All other loans		8		—		—		—		8
Unallocated		3		793		—		—		796
Total loans	$	8,819	$	—	$	(576)	$	150	$	8,393

	Three Months Ended September 30, 2018
			Provision
	June 30, 2018		Allocation		Charge-offs		Recoveries		September 30, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	3,551	$	(392)	$	(35)	$	42	$	3,166
Commercial		2,189		(477)		—		7		1,719
Construction and land development		1,429		(270)		(116)		1		1,044
Second mortgages		32		(2)		—		2		32
Multifamily		326		(2)		—		—		324
Agriculture		6		—		—		—		6
Total real estate loans		7,533		(1,143)		(151)		52		6,291
Commercial loans		1,162		380		(6)		31		1,567
Consumer installment loans		169		20		(33)		11		167
All other loans		3		2		—		—		5
Unallocated		222		741		—		—		963
Total loans	$	9,089	$	—	$	(190)	$	94	$	8,993

	Nine Months Ended September 30, 2019
			Provision
	December 31, 2018		Allocation		Charge-offs		Recoveries		September 30, 2019
Mortgage loans on real estate:
Residential 1‑4 family	$	2,281	$	394	$	(178)	$	244	$	2,741
Commercial		1,810		430		(277)		71		2,034
Construction and land development		1,161		(390)		(212)		71		630
Second mortgages		20		51		—		5		76
Multifamily		371		(162)		—		41		250
Agriculture		17		30		—		—		47
Total real estate loans		5,660		353		(667)		432		5,778
Commercial loans		1,894		129		(355)		7		1,675
Consumer installment loans		152		116		(234)		102		136
All other loans		12		(4)		—		—		8
Unallocated		1,265		(469)		—		—		796
Total loans	$	8,983	$	125	$	(1,256)	$	541	$	8,393

15

	Nine Months Ended September 30, 2018
			Provision
	December 31, 2017		Allocation		Charge-offs		Recoveries		September 30, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	3,466	$	(327)	$	(88)	$	115	$	3,166
Commercial		2,423		(731)		—		27		1,719
Construction and land development		1,247		(124)		(116)		37		1,044
Second mortgages		24		4		—		4		32
Multifamily		496		(172)		—		—		324
Agriculture		14		(8)		—		—		6
Total real estate loans		7,670		(1,358)		(204)		183		6,291
Commercial loans		1,139		427		(45)		46		1,567
Consumer installment loans		110		16		(145)		186		167
All other loans		3		(1)		—		3		5
Unallocated		47		916		—		—		963
Total loans	$	8,969	$	—	$	(394)	$	418	$	8,993

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	350	$	2,391	$	2,741	$	2,968	$	219,035	$	222,003
Commercial		84		1,950		2,034		3,682		389,382		393,064
Construction and land development		16		614		630		406		130,571		130,977
Second mortgages		—		76		76		—		6,384		6,384
Multifamily		—		250		250		2,494		71,280		73,774
Agriculture		—		47		47		—		9,457		9,457
Total real estate loans		450		5,328		5,778		9,550		826,109		835,659
Commercial loans		469		1,206		1,675		847		185,152		185,999
Consumer installment loans		1		135		136		7		11,876		11,883
All other loans		—		8		8		—		981		981
Unallocated		—		796		796		—		—		—
Total loans	$	920	$	7,473	$	8,393	$	10,404	$	1,024,118	$	1,034,522

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	December 31, 2018
	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Impairment		Impairment		Total		Impairment		Impairment		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	349	$	1,932	$	2,281	$	3,694	$	212,574	$	216,268
Commercial		482		1,328		1,810		5,052		374,852		379,904
Construction and land development		515		646		1,161		4,571		115,842		120,413
Second mortgages		—		20		20		—		6,778		6,778
Multifamily		—		371		371		2,559		56,998		59,557
Agriculture		—		17		17		—		8,370		8,370
Total real estate loans		1,346		4,314		5,660		15,876		775,414		791,290
Commercial loans		900		994		1,894		1,983		186,739		188,722
Consumer installment loans		—		152		152		—		12,048		12,048
All other loans		—		12		12		—		1,645		1,645
Unallocated		—		1,265		1,265		—		—		—
Total loans	$	2,246	$	6,737	$	8,983	$	17,859	$	975,846	$	993,705

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 $14.9 million and $17.4 million at September 30, 2019 and December 31, 2018, 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. The possibility of loss is extremely high.

17

The following tables present the composition of loans by credit quality indicator at September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019
	Pass		Special  Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	217,189	$	3,523	$	1,291	$	—	$	222,003
Commercial		387,245		3,325		2,494		—		393,064
Construction and land development		130,156		415		406		—		130,977
Second mortgages		5,839		545		—		—		6,384
Multifamily		71,280		—		2,494		—		73,774
Agriculture		9,403		54		—		—		9,457
Total real estate loans		821,112		7,862		6,685		—		835,659
Commercial loans		180,282		1,811		3,906		—		185,999
Consumer installment loans		11,862		14		7		—		11,883
All other loans		981		—		—		—		981
Total loans	$	1,014,237	$	9,687	$	10,598	$	—	$	1,034,522

	December 31, 2018
	Pass		Special  Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1‑4 family	$	211,832	$	3,179	$	1,257	$	—	$	216,268
Commercial		372,745		3,551		3,608		—		379,904
Construction and land development		115,650		192		4,571		—		120,413
Second mortgages		6,686		92		—		—		6,778
Multifamily		56,802		196		2,559		—		59,557
Agriculture		8,312		58		—		—		8,370
Total real estate loans		772,027		7,268		11,995		—		791,290
Commercial loans		184,004		1,798		2,920		—		188,722
Consumer installment loans		12,042		6		—		—		12,048
All other loans		1,645		—		—		—		1,645
Total loans	$	969,718	$	9,072	$	14,915	$	—	$	993,705

In accordance with FASB Accounting Standards Update (ASU) 2011‑02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 25 and 24 loans that met the definition of a TDR at September 30, 2019 and 2018, respectively.

The Company had no loan modifications considered to be TDRs during the three and nine months ended September 30, 2019. During the three months ended September 30, 2018, the Company modified one commercial real estate loan that was considered to be a TDR. The Company restructured the terms for this loan, which had a pre- and post-modification balance of $126,000. During the nine months ended September 30, 2018, the Company modified one multifamily loan and one commercial real estate loan that were considered to be TDRs, which had a total pre- and post-modification balance of $2.6 million and $126,000, respectively. The Company restructured the terms for both loans.

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during the three months ended September 30, 2019. During the nine months ended September 30, 2019, one loan that had been restructured during the previous 12 months went into default. This multifamily real estate loan had a recorded investment of $2.6 million. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either the three and nine months ended September 30, 2018.

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.

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At September 30, 2019, the Company had 1‑4 family mortgages in the amount of $112.3 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $93.7 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

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

As of September 30, 2019 and December 31, 2018, the outstanding contractual balance of the PCI loans was $55.2 million and $62.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

	September 30, 2019				December 31, 2018
			% of PCI				% of PCI
	Amount		Loans		Amount		Loans
Mortgage loans on real estate:
Residential 1‑4 family	$	30,367	89.43	%	$	34,240	89.43	%
Commercial		700	2.06			746	1.95
Construction and land development		1,200	3.53			1,326	3.46
Second mortgages		1,457	4.29			1,729	4.52
Multifamily		234	0.69			244	0.64
Total real estate loans		33,958	100.00			38,285	100.00
Total PCI loans	$	33,958	100.00	%	$	38,285	100.00	%

There was no activity in the allowance for loan losses on PCI loans for the three and nine months ended September 30, 2019 and 2018.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019				December 31, 2018
	Allowance		Recorded				Recorded
	for loan		investment in		Allowance for		investment in
	losses		loans		loan losses		loans
Mortgage loans on real estate:
Residential 1‑4 family	$	156	$	30,367	$	156	$	34,240
Commercial		—		700		—		746
Construction and land development		—		1,200		—		1,326
Second mortgages		—		1,457		—		1,729
Multifamily		—		234		—		244
Total real estate loans		156		33,958		156		38,285
Total PCI loans	$	156	$	33,958	$	156	$	38,285

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The change in the accretable yield balance for the nine months ended September 30, 2019 and the year ended December 31, 2018, is as follows (dollars in thousands):

Balance, January 1, 2018	$	44,126
Accretion		(5,219)
Reclassification to nonaccretable difference		(800)
Balance, December 31, 2018	$	38,107
Accretion		(4,852)
Reclassification from nonaccretable difference		1,502
Balance, September 30, 2019	$	34,757

The PCI loans were not classified as nonperforming assets as of September 30, 2019, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned at September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019		December 31, 2018
Residential 1‑4 family	$	233	$	314
Commercial		—		15
Construction and land development		4,507		770
Total other real estate owned	$	4,740	$	1,099

At September 30, 2019, the Company had $467,000 in residential 1‑4 family loans and PCI loans that were in the process of foreclosure.

Note 6. Deposits

The following table provides interest bearing deposit information, by type, at September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019		December 31, 2018
NOW	$	147,639	$	165,946
MMDA		130,263		126,933
Savings		96,388		92,910
Time deposits less than or equal to $250,000		483,745		485,155
Time deposits over $250,000		136,206		128,945
Total interest bearing deposits	$	994,241	$	999,889

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Note 7. Accumulated Other Comprehensive Income (Loss)

The following tables present activity net of tax in accumulated other comprehensive income (loss) (AOCI) for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Three months ended September 30, 2019
							Accumulated
	Unrealized		Defined		Gain (Loss) on		Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)
Beginning balance	$	2,798	$	(857)	$	9	$	1,950
Other comprehensive income (loss) before reclassifications		948		—		(122)		826
Amounts reclassified from AOCI		(39)		—		—		(39)
Net current period other comprehensive income (loss)		909		—		(122)		787
Ending balance	$	3,707	$	(857)	$	(113)	$	2,737

	Three months ended September 30, 2018
							Accumulated
	Unrealized		Defined		Gain (Loss) on		Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)
Beginning balance	$	(1,517)	$	(1,048)	$	302	$	(2,263)
Other comprehensive income (loss) before reclassifications		(968)		—		(27)		(995)
Amounts reclassified from AOCI		(53)		—		—		(53)
Net current period other comprehensive income (loss)		(1,021)		—		(27)		(1,048)
Ending balance	$	(2,538)	$	(1,048)	$	275	$	(3,311)

	Nine months ended September 30, 2019
							Accumulated
	Unrealized		Defined		Gain (Loss) on		Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)
Beginning balance	$	(618)	$	(857)	$	196	$	(1,279)
Other comprehensive income (loss) before reclassifications		4,539		—		(309)		4,230
Amounts reclassified from AOCI		(214)		—		—		(214)
Net current period other comprehensive income (loss)		4,325		—		(309)		4,016
Ending balance	$	3,707	$	(857)	$	(113)	$	2,737

	Nine months ended September 30, 2018
							Accumulated
	Unrealized		Defined		Gain (Loss) on		Other
	Gain (Loss) on		Benefit		Cash Flow		Comprehensive
	Securities		Pension Plan		Hedge		Income (Loss)
Beginning balance	$	954	$	(1,048)	$	137	$	43
Other comprehensive income (loss) before reclassifications		(3,428)		—		138		(3,290)
Amounts reclassified from AOCI		(64)		—		—		(64)
Net current period other comprehensive income (loss)		(3,492)		—		138		(3,354)
Ending balance	$	(2,538)	$	(1,048)	$	275	$	(3,311)

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The following tables present the effects of reclassifications out of AOCI on line items of consolidated income for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Three months ended
	September 30, 2019		September 30, 2018
Securities available for sale:
Unrealized gains on securities available for sale	$	(50)	$	(68)	Gain on securities transactions, net
Related tax expense		11		15	Income tax expense
	$	(39)	$	(53)	Net of tax

					Affected Line Item in the Unaudited Consolidated
Details about AOCI Components	Amount Reclassified from AOCI				Statement of Income
	Nine months ended
	September 30, 2019		September 30, 2018
Securities available for sale:
Unrealized gains on securities available for sale	$	(274)	$	(82)	Gain on securities transactions, net
Related tax expense		60		18	Income tax expense
	$	(214)	$	(64)	Net of tax

Note 8. Fair Values of Assets and Liabilities

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that 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 September 30, 2019.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

	September 30, 2019
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	7,957	$	—	$	7,957	$	—
U.S. Government agencies		22,955		—		22,955		—
State, county and municipal		94,670		—		94,670		—
Mortgage backed securities		47,794		—		47,794		—
Asset backed securities		10,708		—		10,708		—
Corporate bonds		6,075		—		6,075		—
Total investment securities available for sale		190,159		—		190,159		—
Cash flow hedge asset		15		—		15		—
Total assets at fair value	$	190,174	$	—	$	190,174	$	—
Cash flow hedge liability	$	157		—	$	157		—
Total liabilities at fair value	$	157	$	—	$	157	$	—

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Investment securities available for sale
U.S. Treasury securities	$	13,124	$	1,479	$	11,645	$	—
U.S. Government agencies		24,609		2,178		22,431		—
State, county and municipal		112,542		2,644		109,898		—
Mortgage backed securities		46,417		3,496		42,921		—
Asset backed securities		5,411		—		5,411		—
Corporate bonds		4,623		—		4,623		—
Total investment securities available for sale		206,726		9,797		196,929		—
Cash flow hedge asset		253		—		253		—
Total assets at fair value	$	206,979	$	9,797	$	197,182	$	—
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 (Level 1). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses reputable pricing companies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 18 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable

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cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019
	Total		Level 1		Level 2		Level 3
Impaired loans	$	3,142	$	—	$	—	$	3,142
Bank premises and equipment held for sale		1,589		—		—		1,589
Other real estate owned		4,740		—		—		4,740
Total assets at fair value	$	9,471	$	—	$	—	$	9,471
Total liabilities at fair value	$	—	$	—	$	—	$	—

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Impaired loans	$	9,343	$	—	$	—	$	9,343
Loans held for sale		146		—		146		—
Bank premises and equipment held for sale		1,252		—		—		1,252
Other real estate owned		1,099		—		—		1,099
Total assets at fair value	$	11,840	$	—	$	146	$	11,694
Total liabilities at fair value	$	—	$	—	$	—	$	—

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At September 30, 2019 and December 31, 2018, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. When the fair value of the collateral is based on an observable market price or a current appraised value without further adjustment for unobservable inputs, 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. When 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, 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 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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Loans held for sale

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

Bank premises and equipment held for sale

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

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, establishing a new cost basis. 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 disposal 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. Additionally, in accordance with FASB ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

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

	September 30, 2019
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	38,213	$	39,131	$	—	$	39,131	$	—
Loans, net of allowance		1,026,129		1,026,129		—		—		1,026,129
PCI loans, net of allowance		33,802		40,717		—		—		40,717
Financial liabilities:
Interest bearing deposits		994,241		995,189		—		995,189		—
Borrowings		77,791		77,760		—		77,760		—

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	December 31, 2018
			Estimated Fair
	Carrying Value		Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	42,108	$	42,253	$	—	$	42,253	$	—
Loans, net of allowance		984,722		978,778		—		—		978,778
PCI loans, net of allowance		38,129		42,674		—		—		42,674
Financial liabilities:
Interest bearing deposits		999,889		997,714		—		997,714		—
Borrowings		63,571		63,393		—		63,393		—

Note 9. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of shares outstanding during the period, including the effect of all potentially dilutive shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three and nine months ended September 30, 2019 and 2018 (dollars and shares in thousands, except per share data):

			Weighted Average
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Amount
For the three months September 30, 2019
Basic EPS	$	4,613	22,303	$	0.21
Effect of dilutive stock awards		—	258		(0.01)
Diluted EPS	$	4,613	22,561	$	0.20
For the three months ended September 30, 2018
Basic EPS	$	3,955	22,115	$	0.18
Effect of dilutive stock awards		—	512		(0.01)
Diluted EPS	$	3,955	22,627	$	0.17
For the nine months ended September 30, 2019
Basic EPS	$	11,660	22,224	$	0.52
Effect of dilutive stock awards		—	251		—
Diluted EPS	$	11,660	22,475	$	0.52
For the nine months ended September 30, 2018
Basic EPS	$	10,331	22,095	$	0.47
Effect of dilutive stock awards		—	481		(0.01)
Diluted EPS	$	10,331	22,576	$	0.46

Antidilutive shares issuable under awards or options of 253,000 were excluded from the computation of diluted earnings per common share for each of the three and nine months ended September 30, 2019. There were no antidilutive exclusions from the computation of diluted earnings per share for the three and nine months ended September 30, 2018.

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Note 10. Employee Benefit Plan

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company froze the plan benefits for all the defined benefit plan participants effective December 31, 2010.

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

The following table provides the components of net periodic benefit cost for the plan included in salaries and employee benefits in the consolidated statement of income for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest cost	$	41	$	39	$	122	$	117
Expected return on plan assets		(53)		(59)		(159)		(177)
Amortization of prior service cost		1		1		3		3
Recognized net loss due to settlement		40		—		93		—
Recognized net actuarial loss		12		15		36		45
Net periodic benefit expense (income)	$	41	$	(4)	$	95	$	(12)

Note 11. Cash Flow Hedge

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had cash flow hedges with total notional amounts of $40 million and $30 million at September 30, 2019 and December 31, 2018, respectively. The swaps were entered into with a counterparty that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant. The Company had collateral pledged of $180,000 and $0 at September 30, 2019 and December 31, 2018, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815, Derivatives and Hedging, the Company has designated the swaps as cash flow hedges, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be highly effective for the three and nine month periods ended September 30, 2019 and 2018. The Company recorded a fair value asset of $15,000 and a fair value liability of $157,000 in other assets and other liabilities, respectively, at September 30, 2019.  The Company recorded a fair value asset of $253,000 in other assets at December 31, 2018. The net gain (loss) was recorded as a component of other comprehensive income (loss) net of associated tax effects.

Note 12. Revenue Recognition

The Company recognizes income in accordance with FASB ASU 2014‑09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

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Service charges on deposit accounts

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

Interchange and ATM fees

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

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period.

The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Noninterest income
In-scope of Topic 606:
Service charges on deposit accounts	$	486	$	411	$	1,341	$	1,192
Interchange and ATM fees		271		215		732		626
Brokerage fees and commissions		67		76		262		272
Noninterest income (in-scope of Topic 606)		824		702		2,335		2,090
Noninterest income (out-of-scope of Topic 606)		687		509		1,641		1,289
Total noninterest income	$	1,511	$	1,211	$	3,976	$	3,379

Note 13. Leases

On January 1, 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises.  The guidance was implemented using the modified retrospective transition approach at the date of adoption with no cumulative effect adjustment to opening retained earnings and no material impact on the measurement of operating lease costs.  Prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting policies, resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption.   The Company elected the practical expedient package, which allowed it to not reassess (1) whether expired or existing contracts are or contain a lease, (2) the lease classification of expired or existing leases, and (3) the initial direct costs for any existing leases.  The Company also elected the practical expedient to use hindsight in determining the lease term for existing leases, thereby including renewal options that the Company is reasonably certain will be exercised in the lease term.  The adoption of this ASU resulted in the recognition of operating lease assets of $7.4 million and lease liabilities of $7.6 million at January 1, 2019. 

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

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

	Operating Leases
Gross lease liability	$	9,583
Less: imputed interest		(2,616)
Present value of lease liability	$	6,967

The weighted average remaining lease term and weighted average discount rate for operating leases at September 30, 2019 was 12.0 years and 4.59%, respectively. Maturities of the gross operating lease liability at September 30, 2019 are as follows (dollars in thousands):

2019	$	305
2020		1,231
2021		1,191
2022		600
2023		630
Thereafter		5,626
Total of future payments	$	9,583

Operating lease costs and sublease rental income for the three months ended September 30, 2019 were $318,000 and $63,000, respectively.  Rental expense and sublease rental income under operating lease agreements for the three months ended September 30, 2018 were $319,000 and $27,000, respectively. Operating lease costs and sublease rental income for the nine months ended September 30, 2019 were $1.1 million and $129,000, respectively. Rental expense and sublease rental income under operating lease agreements for the nine months ended September 30, 2018 were $1.0 million and $81,000, respectively.  Included in operating lease costs was $138,000 for the nine months period ended September 30, 2019, related to the early termination of an unprofitable branch recognized on June 30, 2019.

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

The following discussion and analysis of the financial condition at September 30, 2019 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three and nine months ended September 30, 2019 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, 2018.

OVERVIEW

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices, 18 of which are in Virginia and six of which are in Maryland.  The Bank also operates two loan production offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, small businesses and larger commercial companies, including individual and commercial demand and time

29

deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and cash management services.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through branch growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses.

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

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

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

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

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

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

· the interest rate environment;

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

· real estate values;

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

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

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

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

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

30

· assumptions and estimates that underlie the accounting for purchased credit impaired loans;

· consumer profiles and spending and savings habits;

· levels of fraud in the banking industry;

· the level of attempted cyber attacks in the banking industry;

· the securities and credit markets;

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

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

· inflation;

· technology; and

· legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018 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.

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

Allowance for Loan Losses on Loans

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

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and

31

current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

· Residential 1‑4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

· Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

· Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

· Second mortgages on residential 1‑4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

· Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

· Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

· Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

· Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

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· All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

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

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

Large groups of smaller balance homogeneous loans are evaluated for impairment as a pool. Accordingly, the Company does not separately analyze these individual loans for impairment disclosures.

Accounting for Certain Loans Acquired in a Transfer

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

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

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

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

RESULTS OF OPERATIONS

Overview

Net income of $4.6 million for the third quarter of 2019 was an increase of $658,000, or 16.6%, compared with net income of $4.0 million for the third quarter of 2018. Interest and dividend income increased by $2.3 million in the third quarter of 2019 compared with the same period in 2018, driven by interest and fees on loans, which increased $1.3 million, and interest and fees on PCI loans, which increased $1.1 million. Noninterest income increased by $300,000 year over year. Offsetting these increases was an increase of $939,000 in noninterest expenses, an increase of $877,000 in interest expense and an increase of $142,000 in income tax expense.

Two separate items of note occurred during the quarter. First, a $1.1 million payoff of a loan within the PCI portfolio was received. The PCI portfolio contains six separate pools, two of which, due to the uncertain nature of the cash flows, have no carrying value. This $1.1 million payoff was recorded in one of those pools, the Acquisition, Development and Construction (ADC) pool, resulting in the entire payment being interest income. The other item was the migration of a $4.0 million nonperforming loan, charged down by $200,000 and moved into the OREO category at $3.8 million. As a part of this transaction, the Bank paid delinquent real estate taxes in the amount of $624,000 on this property, all of which was expensed in other real estate expense, net in the current quarter.

Net income was $11.7 million for the first nine months of 2019 compared with $10.3 million for the same period in 2018. This is an increase of $1.3 million, or 12.9%. Interest and dividend income increased by $5.4 million, or 12.4%, and noninterest income increased by $597,000, or 17.7%. Offsetting these increases to net income were increases of $3.0 million in interest expense, $1.2 million in noninterest expense, $125,000 in provision for loan losses and $376,000 in income tax expense. Earnings per common share, basic and fully diluted, were $0.52 for the first nine months of 2019 compared with $0.47, basic, and $0.46, fully diluted, for the first nine months of 2018.

Net Interest Income

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

Net interest income increased $1.4 million, or 12.0%, from the third quarter of 2018 to the third quarter of 2019. Net interest income was $13.4 million in the third quarter of 2019 compared with $12.0 million for the same period in 2018.  Interest and fees on loans increased by $1.3 million, or 10.9%, year over year, and was $13.2 million for the third quarter of 2019. Interest and fees on PCI loans of $2.3 million is an increase of $1.1 million, driven by the $1.1 million ADC payment. The average balance of loans, excluding PCI loans, was $965.8 million for the third quarter of 2018 and increased

34

by $71.7 million, or 7.4%, in the third quarter of 2019. The yield on loans also increased, year over year, and was 4.89% in the third quarter of 2018 and increased by 15 basis points to 5.04% in the third quarter of 2019.

Interest income on securities of $1.8 million was a year-over-year decrease of $48,000. Interest income on securities, on a tax-equivalent basis, was $1.9 million in the third quarter of 2019, which was a decrease of $95,000 compared with the third quarter of 2018. This decrease was driven both by average balance and yield.  The average balance of the securities portfolio decreased $8.7 million year over year.  Additionally, on a tax-equivalent basis, the yield on investment securities decreased four basis points and was 3.25% in the third quarter of 2019 and 3.21% in the third quarter of 2018. 

Interest expense increased $877,000, or 27.7%, when comparing the third quarter of 2019 and the third quarter of 2018. Interest expense on deposits increased $999,000, or 37.0%, as the average balance of interest bearing deposits increased $39.9 million, or 4.1%.  The increase in deposit cost was driven by an increase in time deposit average balances, which increased $39.2 million, or 6.6%, year over year. The cost of time deposits increased from 1.56% to 2.06%, which resulted in an increase in the cost of total interest bearing deposits from 1.10% to 1.45%, over the same time frame. FHLB and other borrowings decreased, on average, $28.7 million year over year, and there was a slight increase in the rate paid, from 1.98% in the third quarter of 2018 to 1.99% in the third quarter of 2019.  Overall, the Bank’s cost of interest bearing liabilities increased 31 basis points, from 1.18% in the third quarter of 2018 to 1.49% in the third quarter of 2019.

The tax-equivalent net interest margin increased 25 basis points, from 3.77% in the third quarter of 2018 to 4.02% in the third quarter of 2019.  Likewise, the interest spread increased from 3.58% to 3.74% over the same time period.  The increase in the margin was precipitated by the increase of $2.4 million in loan income, including the PCI loan payoff, and from an increase in the average balances in noninterest bearing deposits of $24.0 million and shareholders’ equity of $19.7 million.

Net interest income was $37.5 million for the first nine months of 2019, an increase of $2.5 million, or 7.0%, when comparing the first nine months of 2018 and 2019.  The yield on earning assets was 5.02% for the first nine months of 2019 compared with 4.67% for the first nine months of 2018. Interest and fees on loans of $38.2 million in the first nine months of 2019 was an increase of $4.1 million compared with $34.1 million for the same period in 2018.  Interest and fees on PCI loans, including the $1.1 million ADC payment noted above, increased $940,000 over this same time frame.  For the first nine months of 2019 compared with the same period in 2018, securities income increased $265,000. On a tax-equivalent basis the increase was $158,000. The average balance of tax-exempt securities declined $18.8 million, thus reducing the benefit received on a tax-equivalent basis on these securities. The tax-equivalent yield on the portfolio increased and was 3.17% for the first nine months of 2019 compared with 3.10% for the same period in 2018.

Interest expense of $11.6 million represented an increase of $3.0 million, or 34.6%, in the first nine months of 2019 compared with the same period in 2018. Average interest bearing liabilities increased $19.0 million, or 1.8%.  The cost of interest bearing liabilities increased from 1.09% for the first nine months of 2018 to 1.44% for the first nine months of 2019. Driving the increase was growth of $65.5 million, or 11.5%, in the average balance of time deposits, from $569.0 million for the first nine months of 2018 to $634.4 million for the same period in 2019. This growth in time deposits, as a result of higher rates, came partly from a shift away from savings and money market accounts, which experienced a decline of $13.2 million in average balances between the comparison periods. Additionally, time deposit growth included a shift out of FHLB and other borrowings, which reflected an average balance decline of $35.0 million, or 35.2%, over the two nine-month comparison periods.

The tax-equivalent net interest margin was 3.84% for the first nine months of 2019 compared with 3.76% for the first nine months of 2018. The yield on earning assets increased by 35 basis points over this time frame to 5.02%. The competition for funding, however, pushed the cost of interest bearing liabilities up an equal amount, 35 basis points, from 1.09% to 1.44%.  The net interest spread was 3.58% for the first nine months of each of 2018 and 2019. The net interest margin of 3.84% for the first nine months of 2019 is an increase from 3.76% for the first nine months of 2018. The net interest margin has been enhanced by growth in the average balance of noninterest bearing deposits of $18.2 million, or 11.9%, and in shareholders’ equity of $17.6 million, or 13.8%. Excluding the $1.1 million ADC loan payment, the yield on the PCI portfolio would have been 13.72%, the yield on earning assets would have been 4.91%, the interest spread would have been 3.47% and the net interest margin would have been 3.73%.

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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 and nine months ended September 30, 2019 and 2018. The tables also set forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the tables, as loans carrying a zero yield.

	Three months ended September 30, 2019						Three months ended September 30, 2018
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,037,433	$	13,187	5.04	%	$	965,763	$	11,893	4.89	%
PCI loans		34,999		2,333	26.07			39,614		1,265	12.49
Total loans		1,072,432		15,520	5.74			1,005,377		13,158	5.19
Interest bearing bank balances		13,454		87	2.58			15,244		94	2.45
Federal funds sold		1,795		9	2.08			91		—	1.92
Securities (taxable)		195,401		1,489	3.05			179,738		1,364	3.04
Securities (tax exempt) (1)		49,616		450	3.63			73,985		669	3.62
Total earning assets		1,332,698		17,555	5.23			1,274,435		15,285	4.76
Allowance for loan losses		(8,872)						(9,219)
Non-earning assets		101,129						94,804
Total assets	$	1,424,955					$	1,360,020
LIABILITIES AND SHAREHOLDERS’ EQUITY
Demand - interest bearing	$	155,208		85	0.22		$	153,794		81	0.21
Savings and money market		224,401		330	0.58			225,100		278	0.49
Time deposits		632,625		3,283	2.06			593,450		2,340	1.56
Total interest bearing deposits		1,012,234		3,698	1.45			972,344		2,699	1.10
Short-term borrowings		4,409		28	2.53			2,163		13	2.32
FHLB and other borrowings		62,079		315	1.99			90,761		452	1.98
Total interest bearing liabilities		1,078,722		4,041	1.49			1,065,268		3,164	1.18
Noninterest bearing deposits		181,249						157,252
Other liabilities		14,246						6,509
Total liabilities		1,274,217						1,229,029
Shareholders’ equity		150,738						130,991
Total liabilities and shareholders’ equity	$	1,424,955					$	1,360,020
Net interest earnings			$	13,514					$	12,121
Interest spread					3.74	%					3.58	%
Net interest margin					4.02	%					3.77	%
Tax equivalent adjustment:
Securities			$	95					$	141

⁽¹⁾   Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

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	Nine months ended September 30, 2019						Nine months ended September 30, 2018
					Average						Average
	Average		Interest		Rates		Average		Interest		Rates
	Balance		Income/		Earned/		Balance		Income/		Earned/
(Dollars in thousands)	Sheet		Expense		Paid		Sheet		Expense		Paid
ASSETS:
Loans	$	1,016,041	$	38,246	5.03	%	$	956,109	$	34,122	4.77	%
PCI loans		36,321		4,877	17.70			41,366		3,937	12.55
Total loans		1,052,362		43,123	5.48			997,475		38,059	5.10
Interest bearing bank balances		15,752		300	2.55			13,063		203	2.08
Federal funds sold		890		14	2.17			79		1	1.80
Securities (taxable)		190,433		4,483	3.14			177,039		3,816	2.87
Securities (tax exempt) (1)		58,577		1,585	3.61			77,370		2,094	3.61
Total earning assets		1,318,014		49,505	5.02			1,265,026		44,173	4.67
Allowance for loan losses		(8,925)						(9,222)
Non-earning assets		100,221						91,994
Total assets	$	1,409,310					$	1,347,798
LIABILITIES AND SHAREHOLDERS’ EQUITY
Demand - interest bearing	$	156,335		258	0.22		$	155,494		237	0.20
Savings and money market		220,868		930	0.56			234,091		904	0.52
Time deposits		634,434		9,333	1.97			568,983		6,056	1.42
Total interest bearing deposits		1,011,637		10,521	1.39			958,568		7,197	1.00
Short-term borrowings		4,072		84	2.77			3,091		50	2.17
FHLB and other borrowings		64,686		1,023	2.09			99,773		1,392	1.84
Total interest bearing liabilities		1,080,395		11,628	1.44			1,061,432		8,639	1.09
Noninterest bearing deposits		170,919						152,740
Other liabilities		12,809						5,992
Total liabilities		1,264,123						1,220,164
Shareholders’ equity		145,187						127,634
Total liabilities and shareholders’ equity	$	1,409,310					$	1,347,798
Net interest earnings			$	37,877					$	35,534
Interest spread					3.58	%					3.58	%
Net interest margin					3.84	%					3.76	%
Tax equivalent adjustment:
Securities			$	333					$	440

⁽¹⁾ Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21%.

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 Loans in the Critical Accounting Policies section above for further discussion.

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

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

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The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio.  There was no provision for loan losses on the loan portfolio, excluding PCI loans, for the three month periods ended September 30, 2019 and 2018. There was a provision for loan losses of $125,000 on the loan portfolio, excluding PCI loans, for the nine month period ended September 30, 2019 compared with no provision for loan losses for the same period of 2018. The provision recognized during the second quarter of 2019 was due to loan growth of $26.3 million, or 2.6%, during the quarter and an uptick in delinquencies less than 90 days past due and still accruing interest. There was no provision for loan losses on the PCI loan portfolio for the three and nine month periods ended September 30, 2019 or 2018.  Additional discussion of loan quality is presented below.

The loan portfolio, excluding PCI loans, had net charge-offs of $426,000 in the third quarter of 2019, compared with net charge-offs of $96,000 in the third quarter of 2018. Total charge-offs were $576,000 for the third quarter of 2019 compared with $190,000 in the third quarter of 2018. Recoveries of previously charged-off loans were $150,000 for the third quarter of 2019 compared with $94,000 in the third quarter of 2018.

For the nine months ended September 30, 2019, the loan portfolio, excluding PCI loans, had net charge-offs of $715,000 compared with net recoveries of $24,000 in the same time period of 2018. Total charge-offs were $1.3 million for the nine months ended September 30, 2019 compared with $394,000 in the same period of 2018. Recoveries of previously charged-off loans were $541,000 for the nine months ended September 30, 2019 compared with $418,000 in the same period of 2018.

Noninterest Income

Noninterest income increased $300,000, or 24.8%, and was $1.5 million in the third quarter of 2019 compared with $1.2 million in the third quarter of 2018. Other noninterest income increased by $175,000, driven by life insurance proceeds of $120,000, equity investment dividends of $45,000 and swap fee income of $35,000. Service charges and fees were $758,000 in the third quarter of 2019 and increased $132,000 year over year. Mortgage loan income of $176,000 in the third quarter of 2019 was an increase of $79,000 over the same period in 2018. Gain on sale of loans declined $65,000 in the third quarter of 2019 compared with the same period in 2018, and gain(loss) on securities transactions, net declined from $68,000 in the third quarter of 2018 to $50,000 in the same period in 2019.

Noninterest income was $4.0 million for the first nine months of 2019, an increase of $597,000, or 17.7%, compared with $3.4 million for the first nine months of 2018. Service charges and fees, driven by an increase in deposits, were $2.1 million for the first nine months of 2019, an increase of $256,000 compared with the same period in 2018. Other noninterest income was $744,000 for the first nine months of 2019, an increase of $222,000 versus the first nine months of 2018. The 2019 period benefited from the receipt of life insurance proceeds of $120,000, dividends on an equity investment of $45,000 and swap fee income of $35,000. Gain on securities transactions increased $192,000 and was $274,000 for the first nine months of 2019 compared with $82,000 for the same period in 2018. Mortgage loan income of $338,000, driven by low interest rates and refinance activity, increased by $50,000 in the first nine months of 2019 compared with the same period in 2018. Gain on sale of loans declined by $118,000 in the first nine months of 2019 compared with the same period in 2018.

Noninterest Expense

Noninterest expenses were $9.2 million in the third quarter of 2019 and increased $939,000, or 11.3%, compared with the same period in 2018. Other real estate expenses, net increased by the largest dollar amount, $502,000, and were $565,000 for the third quarter of 2019 compared with $63,000 for the third quarter of 2018. Salaries and employee benefits increased by $260,000, or 5.2%, and were $5.3 million for the third quarter of 2019. Other operating expenses increased by $212,000 year over year and were $1.6 million in the third quarter of 2019. Data processing fees of $594,000 in the third quarter of 2019 were $112,000 greater than one year earlier.  Offsetting these increases was a reduction in the FDIC assessment of $191,000 year over year due to the FDIC’s small bank assessment credit of $168,000 received in the third quarter of 2019.

Noninterest expenses were $27.1 million for the first nine months of 2019, as compared with $25.8 million for the same period in 2018.  This is an increase of $1.2 million, or 4.7%. Other real estate expenses, net increased $504,000, and were $662,000 for the first nine months of 2019, compared with $158,000 for the same period in 2018. The major cause

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for the increase was the payment of $624,000 in past due taxes noted above. Expense in 2019 has been reduced by gain on sale of other properties. Occupancy expenses increased $301,000, or 12.7%. Data processing fees increased $274,000, or 18.7% and were $1.7 million for the first nine months of 2019. Other operating expenses increased $247,000 and were $4.6 million for the first nine months of 2019. Equipment expenses increased by $128,000 and were $1.2 million for the first nine months of 2019. Offsetting these increases, the FDIC assessment decreased $283,000 for the first nine months of 2019 compared with the same period in 2018 due to premium rate decreases and the small bank assessment credit mentioned above.

Income Taxes

Income tax expense was $1.1 million for the three months ended September 30, 2019, compared with income tax expense of $945,000 for the third quarter of 2018.  For the nine months ended September 30, 2019, income tax expense was $2.7 million compared with $2.3 million for the first nine months of 2018. The effective tax rate for the third quarter of 2019 was 19.1% versus 19.3% in the third quarter of 2018. For the first nine months of 2019, the effective tax rate was 18.7% and, for the same period in 2018, it was 18.2%. The increase in the effective tax rate was primarily from lower tax-exempt income from municipal securities.    

FINANCIAL CONDITION

General

Total assets increased $29.5 million, or 2.1%, during the first nine months of 2019 to $1.423 billion at September 30, 2019.  Total loans, excluding PCI loans, were $1.035 billion at September 30, 2019, increasing $40.8 million, or 4.1%, from year end 2018.   Total PCI loans were $34.0 million at September 30, 2019 versus $38.3 million at year end 2018.

During the first nine months of 2019, loans, excluding PCI loans, grew by $40.8 million, or 4.1%. Multifamily loans grew $14.2 million, or 23.9%. Commercial mortgage loans grew $13.2 million, or 3.5%. Construction and land development loans grew $10.6 million, or 8.8%. Residential 1 – 4 family loans grew $5.7 million, or 2.7%. Offsetting these increases was a decline in commercial loans of $2.7 million, or 1.4%.

The Company’s securities portfolio, excluding restricted equity securities, decreased $20.5 million, or 8.2%, since year end 2018 to total $228.4 million at September 30, 2019. Securities balances decreased $23.9 million during the third quarter of 2019. Net gains of $50,000 were realized during the third quarter of 2019 through sales and call activity. For the first nine months of 2019, there were net gains of $274,000 realized through sales and call activity. The Company actively manages the portfolio to improve its liquidity and maximize the return within the desired risk profile.

The Company is required to account for the effect of changes in the fair value of securities available-for-sale (AFS) under FASB ASC 320, Investments – Debt and Equity Securities. The fair value of the AFS portfolio was $190.2 million at September 30, 2019 and $206.7 million at December 31, 2018. At September 30, 2019, the Company had a net unrealized gain on the AFS portfolio of $4.8 million compared with a net unrealized loss of $792,000 at December 31, 2018. Municipal securities comprised 49.8% of the total AFS portfolio at September 30, 2019. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of $36.8 million and $34.2 million at September 30, 2019 and December 31, 2018, respectively.  There were federal funds purchased of $71,000 at September 30, 2019 and $19.4 million at December 31, 2018. Interest bearing bank deposits were $13.7 million at September 30, 2019 compared with $15.9 million at December 31, 2018.

Interest bearing deposits at September 30, 2019 were $994.2 million, a decrease of $5.6 million from December 31, 2018. During 2019, NOW accounts declined $18.3 million, or 11.0% and were $147.6 million at September 30, 2019. Time deposits less than or equal to $250,000 decreased $1.4 million and total $483.7 million at September 30, 2019. Time deposits over $250,000 grew by $7.3 million during 2019 and were $136.2 million at September 30, 2019. Savings accounts grew $3.5 million during 2019 and total $96.4 million. Money market deposit accounts, $130.3 million at September 30, 2019, grew $3.3 million, or 2.6%, during the first nine months of 2019.

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FHLB advances were $73.7 million at September 30, 2019, compared with $59.4 million at December 31, 2018.   

Shareholders’ equity was $152.6 million at September 30, 2019 and $137.5 million at December 31, 2018.  Shareholders’ equity to assets was 10.7% at September 30, 2019 and 9.9% at December 31, 2018. 

Asset Quality – excluding PCI loans

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

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

The Company maintains a list of 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. Nonperforming assets totaled $10.5 million at September 30, 2019 and net charge-offs were $715,000 for the nine months ended September 30, 2019. This compares with nonperforming assets of $10.6 million and net recoveries of $14,000 for the year ended December 31, 2018.

Nonperforming loans were $5.7 million at September 30, 2019, a $3.8 million decrease from $9.5 million at December 31, 2018. The $3.8 million decrease in nonperforming loans since December 31, 2018 was the net result of $5.0 million in additions to nonperforming loans and $8.8 million in reductions. The increase related mainly to two commercial loans totaling $616,000, one multifamily real estate loan of $2.6 million, and one 1-4 family residential mortgage loan of $764,000. With respect to the reductions in nonperforming loans, $1.3 million were payments to existing credits, $1.1 million were charge-offs, $1.5 million were paid off, $3.8 million were transferred to OREO, and $1.1 million returned to accruing status.

The allowance for loan losses, excluding PCI, equaled 146.1% of nonaccrual loans at September 30, 2019 compared with 94.6% at December 31, 2018. The ratio of nonperforming assets to loans and OREO decreased 6 basis points. The ratio was 1.01% at September 30, 2019 versus 1.07% at December 31, 2018.

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 restructures 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 September 30, 2019 and December 31, 2018, total impaired loans, excluding PCI loans, equaled $10.4 million and $17.9 million, respectively.

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

	September 30, 2019			December 31, 2018
Nonaccrual loans	$	5,746		$	9,500
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		5,746			9,500
OREO		4,740			1,099
Total nonperforming assets	$	10,486		$	10,599
Accruing troubled debt restructure loans	$	4,658		$	8,359
Balances
Specific reserve on impaired loans		920			2,246
General reserve related to unimpaired loans		7,473			6,737
Total allowance for loan losses		8,393			8,983
Average loans during the year, net of unearned income		1,016,041			960,978
Impaired loans		10,404			17,859
Non-impaired loans		1,024,118			975,846
Total loans, net of unearned income		1,034,522			993,705
Ratios
Allowance for loan losses to loans		0.81	%		0.90	%
Allowance for loan losses to nonaccrual loans		146.10			94.56
General reserve to non-impaired loans		0.73			0.69
Nonaccrual loans to loans		0.56			0.96
Nonperforming assets to loans and OREO		1.01			1.07
Net charge-offs (recoveries) to average loans		0.07			—

A further breakout of nonaccrual loans, excluding PCI loans, at September 30, 2019 and December 31, 2018 is below (dollars in thousands):

	September 30, 2019		December 31, 2018
Mortgage loans on real estate:
Residential 1‑4 family	$	1,349	$	1,257
Commercial		1,059		2,123
Construction and land development		406		4,571
Multifamily		2,494		—
Total real estate loans		5,308		7,951
Commercial loans		431		1,549
Consumer installment loans		7		—
Total loans	$	5,746	$	9,500

Asset Quality – PCI loans

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

The PCI loans are subject to credit review standards for loans.  If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash

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flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairments 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.

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 exceeding regulatory minimums for well capitalized institutions to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

Effective September 2018, the Federal Reserve raised the total consolidated asset limit in the Small Bank Holding Company Policy Statement from $1 billion to $3 billion, thereby eliminating the Company’s consolidated capital reporting requirements. Therefore, the Company only reports capital information at the Bank level.

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on four definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios 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. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. The “leverage ratio” is tier 1 capital divided by total average assets.

The Bank’s ratio of total risk-based capital was 13.8% at September 30, 2019 compared with 13.3% at December 31, 2018. The tier 1 risk-based capital ratio was 13.1% at September 30, 2019 and 12.6% at December 31, 2018. The Bank’s tier 1 leverage ratio was 10.7% at September 30, 2019 and 10.2% at December 31, 2018. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 13.1% at September 30, 2019 and 12.6% at December 31, 2018.

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Bank does not maintain the full amount of the buffer. At September 30, 2019, the Bank had a capital conservation buffer of 5.8%.

Liquidity

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

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The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at September 30, 2019 and December 31, 2018 was as follows (dollars in thousands):

	September 30, 2019			December 31, 2018
Cash and due from banks	$	23,056		$	18,292
Interest bearing bank deposits		13,742			15,927
Available for sale securities, at fair value, unpledged		163,453			174,842
Total liquid assets	$	200,251		$	209,061
Deposits and other liabilities	$	1,270,043		$	1,255,689
Ratio of liquid assets to deposits and other liabilities		15.77	%		16.65	%

The Company maintains unsecured lines of credit of varying amounts with correspondent banks to facilitate short-term liquidity needs. The Company has a total of $55 million in this type of facility in the aggregate at September 30, 2019.

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of September 30, 2019 and December 31, 2018, is as follows (dollars in thousands):

	September 30, 2019		December 31, 2018
Commitments with off-balance sheet risk:
Commitments to extend credit	$	220,249	$	204,831
Standby letters of credit		10,954		5,280
Total commitments with off-balance sheet risks	$	231,203	$	210,111

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.

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had cash flow hedges with total notional amounts of $40 million and $30 million at September 30, 2019 and December 31, 2018, respectively. The Company recorded a fair value asset of $15,000 and a fair value liability of $157,000 in other assets and other liabilities, respectively, at September 30, 2019.  The Company recorded a fair value asset of $253,000 in other assets at December 31, 2018. The Company’s cash flow hedges are deemed to be highly effective. Therefore, the net gain (loss) was recorded as a component of other comprehensive income (loss) recorded in the Company’s consolidated statements of comprehensive income.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. 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 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in the current rate environment, because all results are monitored regardless of likelihood. 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, 200, 300 and 400 basis points at September 30, 2019 (dollars in thousands):

	September 30, 2019
	%	$
Change in Yield curve
+400 bp	5.7	2,827
+300 bp	4.5	2,214
+200 bp	3.1	1,508
+100 bp	1.3	633
most likely	—	—
‑100 bp	(2.1)	(1,029)
‑200 bp	(3.7)	(1,798)
‑300 bp	(3.7)	(1,841)
‑400 bp	(3.7)	(1,841)

At September 30, 2019, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 5.7%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 3.7%. 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.

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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 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  rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

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

Internal Control over Financial Reporting

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

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, 2018.

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

None.

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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 September 30, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

*Filed herewith.

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SIGNATURES

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

	COMMUNITY BANKERS TRUST CORPORATION
	(Registrant)
	/s/ Rex L. Smith, III
	Rex L. Smith, III
	President and Chief Executive Officer
	(principal executive officer)
Date:  November 8, 2019
	/s/ Bruce E. Thomas
	Bruce E. Thomas
	Executive Vice President and Chief Financial Officer
	(principal financial officer)
Date:  November 8, 2019

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