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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 2020

 

or

 

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

 

For the transition period from                      to                     

 

Commission File Number: 0-23976

 


FIRST1NATIONALCORPORATIONA09.JPG

 

 (Exact name of registrant as specified in its charter)

 


 

Virginia

54-1232965

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

112 West King Street, Strasburg, Virginia

22657

(Address of principal executive offices)

(Zip Code)

 

(540) 465-9121

(Registrant’s telephone number, including area code)

 


 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $1.25 per share

FXNC

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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

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  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 9, 2020, 4,858,217 shares of common stock, par value $1.25 per share, of the registrant were outstanding.

 



 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

7

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

9

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

53

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

Item 4.

Mine Safety Disclosures

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

56

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIRST NATIONAL CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)


 

   

(unaudited)

         
    September 30,     December 31,  
    2020     2019*  

Assets

               

Cash and due from banks

  $ 13,349     $ 9,675  

Interest-bearing deposits in banks

    108,857       36,110  

Securities available for sale, at fair value

    117,132       120,983  

Securities held to maturity, at amortized cost (fair value, 2020, $15,638; 2019, $17,646)

    15,101       17,627  

Restricted securities, at cost

    1,848       1,806  

Loans held for sale

          167  

Loans, net of allowance for loan losses, 2020, $7,777; 2019, $4,934

    640,591       569,412  

Premises and equipment, net

    19,548       19,747  

Accrued interest receivable

    3,156       2,065  

Bank owned life insurance

    17,792       17,447  

Core deposit intangibles, net

    43       170  

Other assets

    5,316       4,839  

Total assets

  $ 942,733     $ 800,048  
                 

Liabilities and Shareholders’ Equity

               
                 

Liabilities

               

Deposits:

               

Noninterest-bearing demand deposits

  $ 256,733     $ 189,623  

Savings and interest-bearing demand deposits

    480,017       399,255  

Time deposits

    101,645       117,564  

Total deposits

  $ 838,395     $ 706,442  

Subordinated debt

    9,987       4,983  

Junior subordinated debt

    9,279       9,279  

Accrued interest payable and other liabilities

    2,816       2,125  

Total liabilities

  $ 860,477     $ 722,829  
                 
Commitments and contingencies                  
                 

Shareholders’ Equity

               

Preferred stock, par value $1.25 per share; authorized 1,000,000 shares; none issued and outstanding

  $     $  

Common stock, par value $1.25 per share; authorized 8,000,000 shares; issued and outstanding, 2020, 4,858,217 shares; 2019, 4,969,716 shares

    6,073       6,212  

Surplus

    6,081       7,700  

Retained earnings

    66,670       62,583  

Accumulated other comprehensive income, net

    3,432       724  

Total shareholders’ equity

  $ 82,256     $ 77,219  

Total liabilities and shareholders’ equity

  $ 942,733     $ 800,048  

 

*Derived from audited consolidated financial statements.

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(in thousands, except per share data)


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest and Dividend Income

                               

Interest and fees on loans

  $ 7,568     $ 7,429     $ 22,187     $ 21,625  

Interest on deposits in banks

    25       97       159       340  

Interest and dividends on securities:

                               

Taxable interest

    575       645       1,881       2,078  

Tax-exempt interest

    152       157       454       472  

Dividends

    23       26       75       76  

Total interest and dividend income

  $ 8,343     $ 8,354     $ 24,756     $ 24,591  

Interest Expense

                               

Interest on deposits

  $ 541     $ 1,089     $ 2,179     $ 3,062  
Interest on federal funds purchased           1             1  

Interest on subordinated debt

    160       90       341       269  

Interest on junior subordinated debt

    68       103       225       322  

Interest on other borrowings

                      2  

Total interest expense

  $ 769     $ 1,283     $ 2,745     $ 3,656  

Net interest income

  $ 7,574     $ 7,071     $ 22,011     $ 20,935  

Provision for loan losses

    1,500             3,200       200  

Net interest income after provision for loan losses

  $ 6,074     $ 7,071     $ 18,811     $ 20,735  

Noninterest Income

                               

Service charges on deposit accounts

  $ 446     $ 757     $ 1,475     $ 2,173  

ATM and check card fees

    669       586       1,738       1,676  

Wealth management fees

    573       477       1,610       1,372  

Fees for other customer services

    323       177       767       505  

Income from bank owned life insurance

    131       131       345       333  
Net gains on securities available for sale     38             38        

Net gains on sale of loans

    3       34       60       81  

Other operating income

    18       29       40       71  

Total noninterest income

  $ 2,201     $ 2,191     $ 6,073     $ 6,211  

Noninterest Expense

                               

Salaries and employee benefits

  $ 3,498     $ 3,556     $ 10,109     $ 10,374  

Occupancy

    433       398       1,244       1,237  

Equipment

    439       410       1,267       1,239  

Marketing

    63       143       243       523  

Supplies

    112       86       304       250  

Legal and professional fees

    262       231       842       775  

ATM and check card expense

    259       225       727       666  

FDIC assessment

    52       (6 )     142       98  

Bank franchise tax

    162       136       476       402  

Data processing expense

    191       174       563       526  

Amortization expense

    33       71       127       241  

Net gains on disposal of premises and equipment

                (9 )      

Other operating expense

    631       762       1,857       2,183  

Total noninterest expense

  $ 6,135     $ 6,186     $ 17,892     $ 18,514  

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Continued)

(in thousands, except per share data)


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Income before income taxes

  $ 2,140     $ 3,076     $ 6,992     $ 8,432  

Income tax expense

    386       583       1,290       1,592  

Net income

  $ 1,754     $ 2,493     $ 5,702     $ 6,840  

Earnings per common share

                               

Basic

  $ 0.36     $ 0.50     $ 1.17     $ 1.38  

Diluted

  $ 0.36     $ 0.50     $ 1.17     $ 1.38  

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)


 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income

  $ 1,754     $ 2,493     $ 5,702     $ 6,840  

Other comprehensive income, net of tax,

                               

Unrealized holding gains on available for sale securities, net of tax $8 and $99 for the three months and $700 and $875 for the nine months ended September 30, 2020 and 2019, respectively

    26       375       2,632       3,292  

Unrealized holding losses on securities transferred from held to maturity to available for sale, net of tax $0 and $0 for the three months and $0 and ($91) for the nine months ended September 30, 2020 and 2019, respectively

                      (340 )
Reclassification adjustment for gains included in net income, net of tax ($8) and $0 for the three months and ($8) and $0 for the nine months ended September 30, 2020 and 2019, respectively     (30 )           (30 )      
Change in fair value of cash flow hedges, net of tax $34 and $0 for the three months and $28 and $0 for the nine months ended September 30, 2020 and 2019, respectively     131             106        

Total other comprehensive income

    127       375       2,708       2,952  

Total comprehensive income

  $ 1,881     $ 2,868     $ 8,410     $ 9,792  

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


 

   

Nine Months Ended

 
    September 30,     September 30,  
    2020     2019  

Cash Flows from Operating Activities

               

Net income

  $ 5,702     $ 6,840  

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

               

Depreciation and amortization of premises and equipment

    992       1,003  

Amortization of core deposit intangibles

    127       241  

Amortization of debt issuance costs

    14       13  

Origination of loans held for sale

    (3,183 )     (7,497 )

Proceeds from sale of loans held for sale

    3,410       6,899  

Net gains on sales of loans held for sale

    (60 )     (81 )

Provision for loan losses

    3,200       200  
Net gains on securities available for sale     (38 )      

Increase in cash value of bank owned life insurance

    (345 )     (333 )

Accretion of discounts and amortization of premiums on securities, net

    497       447  

Accretion of premium on time deposits

    (20 )     (46 )

Stock-based compensation

    254       159  

Excess tax benefits on stock-based compensation

    (2 )     (2 )
Gains on disposal of premises and equipment     (9 )      

Deferred income tax benefit

    (1,030 )     (97 )

Changes in assets and liabilities:

               

(Increase) decrease in interest receivable

    (1,091 )     60  

Decrease (increase) in other assets

    688       (1,122 )

(Decrease) increase in accrued expenses and other liabilities

    (28 )     210  

Net cash provided by operating activities

  $ 9,078     $ 6,894  

Cash Flows from Investing Activities

               

Proceeds from maturities, calls, principal payments, and sales of securities available for sale

  $ 24,787     $ 14,431  

Proceeds from maturities, calls, and principal payments of securities held to maturity

    2,444       1,669  

Purchases of securities available for sale

    (18,019 )     (2,336 )

Net purchase of restricted securities

    (42 )     (118 )

Purchase of premises and equipment

    (793 )     (883 )
Proceeds from sale of premises and equipment     9        

Purchase of bank owned life insurance

          (3,000 )

Net increase in loans

    (74,379 )     (28,694 )

Net cash used in investing activities

  $ (65,993 )   $ (18,931 )

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

(in thousands)


 

   

Nine Months Ended

 
    September 30,     September 30,  
    2020     2019  

Cash Flows from Financing Activities

               

Net increase in demand deposits and savings accounts

  $ 147,872     $ 14,497  

Net (decrease) increase in time deposits

    (15,899 )     604  
Proceeds from subordinated debt, net of issuance costs     4,990        

Cash dividends paid on common stock, net of reinvestment

    (1,509 )     (1,257 )

Repurchase of common stock, stock incentive plan

    (47 )     (20 )
Repurchase of common stock, employee stock ownership plan           (32 )
Repurchase of common stock, stock repurchase plan     (2,071 )      

Net cash provided by financing activities

  $ 133,336     $ 13,792  

Increase in cash and cash equivalents

  $ 76,421     $ 1,755  

Cash and Cash Equivalents

               

Beginning

  $ 45,785     $ 28,618  

Ending

  $ 122,206     $ 30,373  

Supplemental Disclosures of Cash Flow Information

               

Cash payments for:

               

Interest

  $ 2,739     $ 3,658  
Income taxes   $ 2,451     $ 1,576  

Supplemental Disclosures of Noncash Investing and Financing Activities

               

Unrealized gains on securities available for sale

  $ 3,294     $ 4,167  

Unrealized losses on securities transferred from held to maturity to available for sale

  $     $ (431 )

Fair value of securities transferred from held to maturity to available for sale

  $     $ 23,036  

Change in fair value of cash flow hedges

  $ 134     $  

Issuance of common stock, dividend reinvestment plan

  $ 106     $ 83  

 

See Notes to Consolidated Financial Statements

 

 

 

FIRST NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(in thousands, except share and per share data)


 

   

Common Stock

   

Surplus

   

Retained Earnings

   

Accumulated Other Comprehensive Income

   

Total

 

Balance, June 30, 2019

  $ 6,206     $ 7,566     $ 58,268     $ 769     $ 72,809  

Net income

                2,493             2,493  

Other comprehensive income

                      375       375  

Cash dividends on common stock ($0.09 per share)

                (447 )           (447 )

Stock-based compensation

          91                   91  

Issuance of 1,498 shares common stock, dividend reinvestment plan

    1       26                   27  
Issuance of 3,500 shares common stock, stock incentive plan     5       (5 )                  
Repurchase of 1,545 shares common stock, employee stock ownership plan     (2 )     (30 )                 (32 )

Balance, September 30, 2019

  $ 6,210     $ 7,648     $ 60,314     $ 1,144     $ 75,316  

 

   

Common Stock

   

Surplus

   

Retained Earnings

   

Accumulated Other Comprehensive Income

   

Total

 

Balance, June 30, 2020

  $ 6,065     $ 5,967     $ 65,451     $ 3,305     $ 80,788  

Net income

                1,754             1,754  

Other comprehensive income

                      127       127  

Cash dividends on common stock ($0.11 per share)

                (535 )           (535 )

Stock-based compensation

          86                   86  

Issuance of 2,530 shares common stock, dividend reinvestment plan

    3       33                   36  
Issuance of 3,500 shares common stock, stock incentive plan     5       (5 )                  

Balance, September 30, 2020

  $ 6,073     $ 6,081     $ 66,670     $ 3,432     $ 82,256  

 

   

Common Stock

   

Surplus

   

Retained Earnings

   

Accumulated Other Comprehensive Income (Loss)

   

Total

 

Balance, December 31, 2018

  $ 6,197     $ 7,471     $ 54,814     $ (1,808 )   $ 66,674  

Net income

                6,840             6,840  

Other comprehensive income

                      2,952       2,952  

Cash dividends on common stock ($0.27 per share)

                (1,340 )           (1,340 )

Stock-based compensation

          159                   159  

Issuance of 4,232 shares common stock, dividend reinvestment plan

    5       78                   83  

Issuance of 8,902 shares common stock, stock incentive plan

    12       (12 )                  

Repurchase of 1,006 shares common stock, stock incentive plan

    (2 )     (18 )                 (20 )
Repurchase of 1,545 shares common stock, employee stock ownership plan     (2 )     (30 )                 (32 )

Balance, September 30, 2019

  $ 6,210     $ 7,648     $ 60,314     $ 1,144     $ 75,316  

 

   

Common Stock

   

Surplus

   

Retained Earnings

   

Accumulated Other Comprehensive Income

   

Total

 

Balance, December 31, 2019

  $ 6,212     $ 7,700     $ 62,583     $ 724     $ 77,219  

Net income

                5,702             5,702  

Other comprehensive income

                      2,708       2,708  

Cash dividends on common stock ($0.33 per share)

                (1,615 )           (1,615 )

Stock-based compensation

          254                   254  

Issuance of 7,267 shares common stock, dividend reinvestment plan

    9       97                   106  

Issuance of 12,492 shares common stock, stock incentive plan

    16       (16 )                  

Repurchase of 2,223 shares common stock, stock incentive plan

    (3 )     (44 )                 (47 )

Repurchase of 129,035 shares common stock, stock repurchase plan

    (161 )     (1,910 )                 (2,071 )

Balance, September 30, 2020

  $ 6,073     $ 6,081     $ 66,670     $ 3,432     $ 82,256  

 

See Notes to Consolidated Financial Statements

 

 

FIRST NATIONAL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)


 

 

Note 1. General

 

The accompanying unaudited consolidated financial statements of First National Corporation (the Company) and its subsidiary, First Bank (the Bank), have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at September 30, 2020 and December 31, 2019, the statements of income and comprehensive income for the three and nine months ended September 30, 2020 and 2019, the cash flows for the nine months ended September 30, 2020 and 2019, and the changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019. The statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Risks and Uncertainties

 

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

 

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law in March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts may have a material impact on the Company’s operations.

 

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

 

Results of Operations

 

The Company’s net interest income could decrease due to COVID-19. In keeping with guidance from regulators, the Company worked with certain COVID-19 affected borrowers in the second and third quarters of 2020 to defer their payments, interest, and fees. While interest still accrues to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact but recognizes the breadth of the economic impact may affect its borrowers' ability to repay in future periods.

 

The Company's noninterest income could decrease due to COVID-19. The Bank suspended certain overdraft fees at the beginning of the second quarter in an effort to provide relief to its customers who may experience financial difficulties related to the pandemic, and as a result, service charges on deposits decreased during those periods as a result of the suspension. Although the overdraft fees that were temporarily suspended have resumed on October 1, 2020, the impact on overdraft income in future periods is uncertain. ATM and check card income could decrease in future periods from changes in customer spending. Wealth management revenue may decrease in future periods if the market values of investments decline and mortgage fee income may decrease from less home buying activity in the Company's market area. At this time, the Company is unable to project the materiality of such an impact but recognizes it may unfavorably affect its noninterest income in future periods.

 

The Company’s noninterest expense could increase due to COVID-19. If the Bank's asset quality worsens, it may incur additional loan expenses in future periods from obtaining updated appraisals on loan collateral, additional legal and professional expenses related to the resolution of problem loans, an increase in other real estate owned expense, and potential losses on the sale of other real estate owned.

 

At this time, the Company is unable to project the full extent or materiality of the foregoing impacts but recognizes the breadth of the economic impacts of COVID-19 may have an unfavorable impact on net interest income, noninterest income, noninterest expense, and loan customers' ability to repay loans, in future periods.

 

10

 

Notes to Consolidated Financial Statements (Unaudited)


 

Capital and Liquidity

 

While the Company believes it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by provision for loan losses in future periods. Larger amounts of provision for loan losses may result from factors including higher specific reserves on newly identified and existing impaired loans, higher levels of net charge-offs, and additional adjustments to qualitative factors in the general reserve component of the Bank’s allowance for loan losses. In March 2020, the Company suspended future stock repurchases under its stock repurchase program due to the economic uncertainty caused by the pandemic, and the program remained suspended in the second and third quarters of 2020. In June 2020, the Company issued $5.0 million of subordinated debt to strengthen holding company liquidity and to remain a source of strength to the Bank in the event of a severe economic downturn resulting from the pandemic. The Company will continue to update its enterprise risk assessment and capital plans as the operating environment develops.

 

The Company maintains access to multiple sources of liquidity. While wholesale funding markets have remained open, interest rates for short term funding could become volatile. If funding costs would become elevated for an extended period of time, it may have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company could become more reliant on volatile or more expensive sources of funding.

 

Processes, Controls and Business Continuity Plan 

 

The Company continues to operate under its Pandemic Continuity of Operations Plan that includes a remote working strategy. The Company has not incurred additional material costs related to employees working remotely. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plan.

 

Lending Operations and Accommodations to Borrowers 

 

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company offered a payment deferral program for its individual and business customers adversely affected by the pandemic that deferred loan payments for up to 90 days. As of September 30, 2020, loans participating in the program totaled $22.6 million, or 3% of the Bank’s loan balances, which was a significant reduction compared to $182.6 million, or 28% of the Bank's loan balances at June 30, 2020. A majority of the loans that transitioned out of the payment deferral program during the quarter have returned to current payment status. In accordance with the CARES Act and interagency guidance issued in August 2020, these short-term loan payment deferrals were not considered troubled debt restructurings.

 

With the passage of the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), the Company actively participated in assisting its customers with applications for resources through the program. During the second and third quarters of 2020, the Bank originated $76.6 million of PPP loans, received $2.5 million of loan fees, and incurred $535 thousand of loan origination costs. The loan fees are being accreted into earnings evenly over the life of the loans, net of the loan costs, through interest and fees on loans. Approximately 99% of the PPP loan balances mature in the second quarter of 2022 and 1% of the loan balances mature in the third quarter of 2025. The Company believes the majority of these loans will ultimately be forgiven and repaid by the SBA in accordance with the terms of the program. As of September 30, 2020, PPP loan balances totaled $73.7 million and customers with PPP loan balances totaling $11.3 million had requested debt forgiveness. These customers have not yet been notified by the SBA of their forgiveness decision. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through additional provision for loan losses charged to earnings.

 

Asset Quality 

 

The economic impact of the pandemic had an unfavorable impact on the financial condition of certain Bank customers. Although many borrowers participated in the loan payment deferral program to date, the Bank plans to consider additional loan modifications in the fourth quarter of 2020 to provide relief to certain customers if they are continuing to experience temporary business interruptions from the pandemic, if the Bank believes the modifications would minimize potential loan charge-offs. We expect significant pressure on several sectors of the loan portfolio to continue, including retail shopping, lodging and leisure, among others.

 

The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic. In addition, the Bank’s loan deferral program could make it difficult to identify the extent that asset quality may be worsening until the payment deferral periods have ended and scheduled loan payments become due.

 

11

 

Notes to Consolidated Financial Statements (Unaudited)


 

Derivative Financial Instruments

 

On April 21, 2020, the Company entered into two interest rate swap agreements related to its outstanding junior subordinated debt. The Company recognizes derivative financial instruments at fair value as either an other asset or other liability in its Consolidated Balance Sheets. The Company’s derivative financial instruments are comprised of interest rate swaps that qualify and are designated as cash flow hedges on the Company’s junior subordinated debt. Gains or losses on the Company’s cash flow hedges are reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Company’s derivative financial instruments are described more fully in Note 16.

 

Adoption of New Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (ASU 2017-04). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). ASU 2018-13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in Topic 820 were also removed or modified. ASU 2018-13 was effective for the Company on January 1, 2020. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

 

In March 2020 (revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the agencies) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (ASC 310-40), a restructuring of debt constitutes a troubled debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company's financial statements; however, this impact cannot be quantified at this time. For further information about the Company's short-term modifications in response to COVID-19 to borrowers who were current prior to any relief, see Note 4.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13).  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has formed a committee to address the compliance requirements of this ASU, which has analyzed gathered data, defined loan pools and segments, and selected methods for applying the concepts included in this ASU. The Company is in the process of testing selected models, building policy and processing documentation, modeling the impact of the ASU on the capital and strategic plans, performing model validation, and finalizing policies and procedures. This guidance may result in material changes in the Company's accounting for credit losses of financial instruments.

 

12

 

Notes to Consolidated Financial Statements (Unaudited)


 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.”  It covers topics including ( 1) measuring current expected credit losses; ( 2) development, governance, and documentation of a systematic methodology; ( 3) documenting the results of a systematic methodology; and ( 4) validating a systematic methodology.
 
In December 2019, the FASB issued ASU No. 2019- 12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes” (ASU 2019- 12).  The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.  For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2019- 12 to have a material impact on its consolidated financial statements.

 

In January 2020, the FASB issued ASU No. 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (ASU 2020-01).  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently in the process of identifying loans and other financial instruments that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company's transition away from LIBOR for its loan and other financial instruments.

 

On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change revises the definition of “accelerated filers” to exclude entities with public float of less than $700 million and less than $100 million in annual revenues. The Company does not expect to meet this revised category of accelerated filer and will no longer be considered as such. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”.  The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K.  Non-accelerated filers, such as the Company, also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. These amendments will change the Company's reporting and audit requirements as it will have the additional time provided to file quarterly and annual financial statements and will no longer be required to obtain an auditor attestation concerning the internal controls over financial reporting.

 

In August 2020, the FASB issued ASU No. 2020-06, "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity" (ASU 2020-06). The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

 

In October 2020, the FASB issued ASU No. 2020-08, "Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs" (ASU 2020-08). This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  Early adoption is not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

 

13

 

Notes to Consolidated Financial Statements (Unaudited)


 

 

Note 2. Securities

 

The Company invests in U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, and corporate debt securities. Amortized costs and fair values of securities at September 30, 2020 and December 31, 2019 were as follows (in thousands):

 

   

September 30, 2020

 
   

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized (Losses)

   

Fair Value

 

Securities available for sale:

                               
U.S. agency and mortgage-backed securities   $ 84,217     $ 3,260     $ (14 )   $ 87,463  
Obligations of states and political subdivisions     28,706       963             29,669  

Total securities available for sale

  $ 112,923     $ 4,223     $ (14 )   $ 117,132  

Securities held to maturity:

                               
U.S. agency and mortgage-backed securities   $ 10,450     $ 302     $     $ 10,752  
Obligations of states and political subdivisions     3,151       150             3,301  
Corporate debt securities     1,500       85             1,585  

Total securities held to maturity

  $ 15,101     $ 537     $     $ 15,638  

Total securities

  $ 128,024     $ 4,760     $ (14 )   $ 132,770  

 

   

December 31, 2019

 
   

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized (Losses)

   

Fair Value

 

Securities available for sale:

                               

U.S. agency and mortgage-backed securities

  $ 94,461     $ 778     $ (334 )   $ 94,905  

Obligations of states and political subdivisions

    25,607       476       (5 )     26,078  

Total securities available for sale

  $ 120,068     $ 1,254     $ (339 )   $ 120,983  

Securities held to maturity:

                               

U.S. agency and mortgage-backed securities

  $ 12,528     $ 6     $ (80 )   $ 12,454  

Obligations of states and political subdivisions

    3,599       81             3,680  

Corporate debt securities

    1,500       12             1,512  

Total securities held to maturity

  $ 17,627     $ 99     $ (80 )   $ 17,646  

Total securities

  $ 137,695     $ 1,353     $ (419 )   $ 138,629  

 

14

 

Notes to Consolidated Financial Statements (Unaudited)


 

At September 30, 2020 and December 31, 2019, investments in an unrealized loss position that were temporarily impaired were as follows (in thousands):

 

   

September 30, 2020

 
   

Less than 12 months

   

12 months or more

   

Total

 
   

Fair Value

    Unrealized (Loss)    

Fair Value

   

Unrealized (Loss)

   

Fair Value

   

Unrealized (Loss)

 

Securities available for sale:

                                               
U.S. agency and mortgage-backed securities   $ 3,093     $ (14 )   $     $     $ 3,093     $ (14 )

Total securities available for sale

  $ 3,093     $ (14 )   $     $     $ 3,093     $ (14 )

 

   

December 31, 2019

 
   

Less than 12 months

   

12 months or more

   

Total

 
   

Fair Value

   

Unrealized (Loss)

   

Fair Value

   

Unrealized (Loss)

   

Fair Value

   

Unrealized (Loss)

 

Securities available for sale:

                                               

U.S. agency and mortgage-backed securities

  $ 29,853     $ (207 )   $ 13,083     $ (127 )   $ 42,936     $ (334 )

Obligations of states and political subdivisions

    1,373       (5 )                 1,373       (5 )

Total securities available for sale

  $ 31,226     $ (212 )   $ 13,083     $ (127 )   $ 44,309     $ (339 )

Securities held to maturity:

                                               

U.S. agency and mortgage-backed securities

  $ 3,516     $ (10 )   $ 5,936     $ (70 )   $ 9,452     $ (80 )

Total securities held to maturity

  $ 3,516     $ (10 )   $ 5,936     $ (70 )   $ 9,452     $ (80 )

Total securities

  $ 34,742     $ (222 )   $ 19,019     $ (197 )   $ 53,761     $ (419 )

 

The tables above provide information about securities that have been in an unrealized loss position for less than twelve consecutive months and securities that have been in an unrealized loss position for twelve consecutive months or more. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Impairment is considered to be other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis. Presently, the Company does not intend to sell any of these securities, does not expect to be required to sell these securities, and expects to recover the entire amortized cost of all the securities.

 

15

 

Notes to Consolidated Financial Statements (Unaudited)


 

At September 30, 2020, there was one out of ninety-three U.S. agency and mortgage-backed securities in an unrealized loss position. One hundred percent of the Company’s investment portfolio is considered investment grade. The weighted-average re-pricing term of the portfolio was 3.1 years at September 30, 2020. At December 31, 2019, there were forty-two out of ninety-four U.S. agency and mortgage-backed securities and three out of seventy-nine obligations of states and political subdivisions in an unrealized loss position. One hundred percent of the Company’s investment portfolio was considered investment grade at December 31, 2019. The weighted-average re-pricing term of the portfolio was 3.7 years at December 31, 2019. The unrealized losses at September 30, 2020 in the U.S. agency and mortgage-backed securities portfolio were related to changes in market interest rates and not credit concerns of the issuers.

 

The amortized cost and fair value of securities at September 30, 2020 by contractual maturity are shown below (in thousands). Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

 

   

Available for Sale

   

Held to Maturity

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Due within one year

  $ 1,409     $ 1,416     $ 392     $ 397  

Due after one year through five years

    13,424       13,984       4,547       4,710  

Due after five years through ten years

    31,236       32,563       3,973       4,148  

Due after ten years

    66,854       69,169       6,189       6,383  
    $ 112,923     $ 117,132     $ 15,101     $ 15,638  

 

On January 1, 2019 the Company adopted ASU No. 2017-12 and reclassified eligible securities with a fair value of $23.0 million from the held to maturity portfolio to the available for sale portfolio. The unrealized loss associated with the reclassified securities totaled $431 thousand on the date of reclassification. The securities were reclassified to provide the Company with opportunities to maximize asset utilization.

 

Federal Home Loan Bank, Federal Reserve Bank, and Community Bankers’ Bank stock are generally viewed as long-term investments and as restricted securities, which are carried at cost, because there is a minimal market for the stock. Therefore, when evaluating restricted securities for impairment, their value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2020, and no impairment has been recognized.

 

The composition of restricted securities at September 30, 2020 and December 31, 2019 was as follows (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 

Federal Home Loan Bank stock

  $ 818     $ 776  

Federal Reserve Bank stock

    980       980  

Community Bankers’ Bank stock

    50       50  
    $ 1,848     $ 1,806  

 

The Company also holds limited partnership investments in Small Business Investment Companies (SBICs), which are included in other assets in the Consolidated Balance Sheets. The limited partnership investments are measured as equity investments without readily determinable fair values at their cost, less any impairment. The amounts included in other assets for the limited partnership investments were $497 thousand and $514 thousand at September 30, 2020 and December 31, 2019, respectively.

 

16

 

Notes to Consolidated Financial Statements (Unaudited)


 

 

Note 3. Loans

 

Loans at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 

Real estate loans:

               

Construction and land development

  $ 27,472     $ 43,164  

Secured by 1-4 family residential

    234,198       229,438  

Other real estate loans

    250,319       236,555  

Commercial and industrial loans

    125,277       50,153  

Consumer and other loans

    11,102       15,036  

Total loans

  $ 648,368     $ 574,346  

Allowance for loan losses

    (7,777 )     (4,934 )

Loans, net

  $ 640,591     $ 569,412  

 

Net deferred loan fees included in the above loan categories were $1.9 million and $340 thousand at September 30, 2020 and December 31, 2019, respectively. Consumer and other loans included $194 thousand and $374 thousand of demand deposit overdrafts at September 30, 2020 and December 31, 2019, respectively.

 

Risk characteristics of each loan portfolio class that are considered by the Company include:

 

 

1-4 family residential mortgage loans carry risks associated with the continued creditworthiness of the borrower and changes in the value of the collateral.

 

 

Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget, and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure or other factors unrelated to the project.

 

 

Other real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project.

 

 

Commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

 

 

Consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral, if any. These loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. They are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Consumer and other loans also include purchased consumer loans which could have been originated outside of the Company's market area.

 

17

 

Notes to Consolidated Financial Statements (Unaudited)


 

The following tables provide a summary of loan classes and an aging of past due loans as of September 30, 2020 and December 31, 2019 (in thousands):

 

   

September 30, 2020

 
   

30-59 Days Past Due

   

60-89 Days Past Due

    > 90 Days Past Due    

Total Past Due

   

Current

    Total Loans     Non-accrual Loans     90 Days or More Past Due and Accruing  

Real estate loans:

                                                               
Construction and land development   $     $ 133     $     $ 133     $ 27,339     $ 27,472     $ 283     $  
Secured by 1-4 family residential     172       339       30       541       233,657       234,198       469        
Other real estate loans           133       321       454       249,865       250,319       4,674        
Commercial and industrial     96                   96       125,181       125,277       1,548        
Consumer and other loans     103       38       6       147       10,955       11,102             6  

Total

  $ 371     $ 643     $ 357     $ 1,371     $ 646,997     $ 648,368     $ 6,974     $ 6  

 

 

   

December 31, 2019

 
   

30-59 Days Past Due

   

60-89 Days Past Due

    > 90 Days Past Due    

Total Past Due

   

Current

    Total Loans     Non-accrual Loans     90 Days or More Past Due and Accruing  

Real estate loans:

                                                               

Construction and land development

  $     $ 136     $ 30     $ 166     $ 42,998     $ 43,164     $ 367     $ 30  

Secured by 1-4 family residential

    1,428       306       115       1,849       227,589       229,438       630       67  

Other real estate loans

    457             416       873       235,682       236,555       462        

Commercial and industrial

    45       50             95       50,058       50,153              

Consumer and other loans

    83       79             162       14,874       15,036              

Total

  $ 2,013     $ 571     $ 561     $ 3,145     $ 571,201     $ 574,346     $ 1,459     $ 97  

 

Credit Quality Indicators

 

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful, and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard, or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

 

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower as agreed.

 

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date.

 

18

 

Notes to Consolidated Financial Statements (Unaudited)


 

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

 

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

 

The following tables provide an analysis of the credit risk profile of each loan class as of September 30, 2020 and December 31, 2019 (in thousands):

 

   

September 30, 2020

 
   

Pass

    Special Mention    

Substandard

   

Doubtful

   

Total

 

Real estate loans:

                                       
Construction and land development   $ 27,031     $     $ 441     $     $ 27,472  
Secured by 1-4 family residential     232,759       510       929             234,198  
Other real estate loans     243,368             6,951             250,319  
Commercial and industrial     122,820             2,457             125,277  
Consumer and other loans     11,102                         11,102  

Total

  $ 637,080     $ 510     $ 10,778     $     $ 648,368  

 

   

December 31, 2019

 
   

Pass

    Special Mention    

Substandard

   

Doubtful

   

Total

 

Real estate loans:

                                       

Construction and land development

  $ 42,636     $     $ 528     $     $ 43,164  

Secured by 1-4 family residential

    228,029       524       885             229,438  

Other real estate loans

    233,240       537       2,778             236,555  

Commercial and industrial

    48,527       948       678             50,153  

Consumer and other loans

    10,976       4,060                   15,036  

Total

  $ 563,408     $ 6,069     $ 4,869     $     $ 574,346  

 

19

 

Notes to Consolidated Financial Statements (Unaudited)


 

 

Note 4. Allowance for Loan Losses

 

The following tables present, as of September 30, 2020, December 31, 2019 and September 30, 2019, the total allowance for loan losses, the allowance by impairment methodology, and loans by impairment methodology (in thousands):

 

   

September 30, 2020

 
    Construction and Land Development     Secured by 1-4 Family Residential     Other Real Estate     Commercial and Industrial     Consumer and Other Loans    

Total

 

Allowance for loan losses:

                                               
Beginning Balance, December 31, 2019   $ 464     $ 776     $ 2,296     $ 562     $ 836     $ 4,934  
Charge-offs                       (69 )     (550 )     (619 )
Recoveries     2       6       2       17       235       262  
Provision for (recovery of) loan losses     (164 )     305       2,691       398       (30 )     3,200  

Ending Balance, September 30, 2020

  $ 302     $ 1,087     $ 4,989     $ 908     $ 491     $ 7,777  

Ending Balance:

                                               
Individually evaluated for impairment                 2,108       181             2,289  
Collectively evaluated for impairment     302       1,087       2,881       727       491       5,488  

Loans:

                                               

Ending Balance

  $ 27,472     $ 234,198     $ 250,319     $ 125,277     $ 11,102     $ 648,368  
Individually evaluated for impairment     283       469       4,674       1,548             6,974